Cybersecurity and Data Privacy - The company was a victim of a cyberattack on its Orion Software Platform and internal systems on December 14, 2020, referred to as the "Cyber Incident" [81] - The Cyber Incident has led to several lawsuits and an ongoing SEC investigation, which could result in significant costs and impact the company's financial condition and stock price [100] - The company has incurred significant costs related to the Cyber Incident, including investigations and remediation efforts, which are expected to continue [97] - The Cyber Incident has adversely affected the company's reputation, customer relations, and may lead to deferred or canceled customer agreements [96] - The company is subject to various global data privacy and security regulations, which could result in additional costs and liabilities [89] - The company has experienced increased costs for cybersecurity insurance as a result of the Cyber Incident, which may continue to rise [98] - The company maintains that its disclosures and internal controls were appropriate, despite the SEC's preliminary determination to recommend enforcement action [100] - The company is heavily dependent on its technology infrastructure, and any future cyberattacks could further compromise its systems and customer data [92] - The company has deployed significant resources as part of its "Secure by Design" plan to enhance cybersecurity measures [99] - The company is currently incurring legal expenses related to ongoing investigations and anticipates significant costs that may not be covered by insurance, potentially impacting its financial condition and operations [102] - The company is subject to various data privacy laws that could impact its marketing practices and increase costs if compliance is required [113] - Recent investigations revealed that a cyber incident involved unauthorized access to email accounts containing personal information, potentially harming the company's reputation and customer trust [158] - Compliance with evolving data protection laws, such as the GDPR, may impose significant costs and operational challenges [160] - The regulatory framework for data protection varies significantly across jurisdictions, increasing compliance costs and potential liabilities [161] - The company may face reputational harm and loss of customer confidence if it fails to adequately protect personal data [160] Financial Performance and Revenue - The company expects fluctuations in quarterly revenue and operating results due to various factors, making future performance difficult to predict [107] - A significant portion of the company's revenue is recurring, and any decline in maintenance or subscription renewals could harm future operating results [118] - The company is focused on increasing sales to existing customers and attracting new customers, which is essential for revenue growth [115] - The success of the company's digital marketing initiatives is critical for capturing high-quality sales leads, and any failure in this area could adversely affect revenue growth [111] - The company is undergoing a shift from perpetual licenses to subscription models, which may lead to variations in revenue recognition timing [117] - The company plans to expand its sales force both domestically and internationally to drive revenue growth, but may face challenges in hiring and retaining qualified personnel [116] - Customer retention rates may decline due to factors such as satisfaction levels, pricing, and competitive offerings, potentially impacting revenue [119] - The company has experienced growth in recent years, but effective management of this growth is critical to maintaining customer satisfaction and financial performance [132] - The company’s financial outlook is based on management estimates and is subject to significant uncertainties, which may lead to material variations from actual results [135] - The success of new products and enhancements is uncertain, with potential challenges in market acceptance and competition affecting financial results [140] International Operations and Market Risks - The company has international operations in multiple countries, including the UK, Canada, and Germany, and plans to continue expanding internationally [120] - The company faces risks associated with international operations, including political instability and compliance costs, which could adversely affect financial performance [121] - Research and development activities are conducted internationally, with some coding outsourced to vendors in Ukraine, which may be impacted by geopolitical conflicts [122] - The company faces risks related to economic conditions, including the impact of the COVID-19 pandemic and geopolitical tensions, which may affect IT spending and demand for products [143] - The company operates in a highly competitive market, facing challenges from larger competitors with greater resources and established customer bases [126] - The company relies on U.S. federal government contracts for a significant portion of on-premises license sales, which can be unpredictable and subject to budgetary constraints [137] Corporate Governance and Structure - The Sponsors beneficially owned 68.9% of the company's common stock as of December 31, 2022, allowing them significant influence over operations and business strategy [213] - The company does not intend to pay dividends on its common stock, opting to retain earnings for business operations and expansion [209] - The trading price of the company's common stock has been volatile, influenced by factors such as new product announcements and changes in customer perception [199] - The company is a controlled entity under NYSE rules, with Sponsors owning a majority of the voting power, allowing exemptions from certain corporate governance requirements [222] - The company has a classified board of directors with staggered terms, which could hinder stockholder efforts to change board membership [211] - The company has the right to amend bylaws to prevent unsolicited takeovers, which may inhibit potential acquirers [215] - The company’s restated charter designates the Delaware Court of Chancery as the exclusive forum for certain disputes, potentially limiting stockholders' options [221] - The company may face conflicts of interest due to relationships between its directors and the Lead Sponsors [215] Debt and Financial Obligations - As of December 31, 2022, the company's total indebtedness was $1.2 billion, with $130 million available for additional borrowing under credit facilities [180] - The net interest expense for the years ended December 31, 2022, 2021, and 2020 was approximately $83.4 million, $64.5 million, and $75.9 million, respectively [180] - The company is subject to a financial covenant requiring that its first lien net leverage ratio cannot exceed 7.40 to 1.00 when borrowings exceed 35% of the aggregate commitments under the revolving credit facility [183] - The company has substantial indebtedness, which could limit its ability to react to changes in business conditions and restrict strategic acquisitions [181] - Borrowings under credit facilities are subject to variable interest rates, exposing the company to interest rate risk [187] - The company may face increased tax liabilities due to complex tax laws and potential changes in tax regulations [198] - The company is subject to various tax obligations across multiple jurisdictions, which could lead to material assessments and penalties [197] - The company may incur significant liabilities if the N-able spin-off is determined to be a taxable transaction, affecting financial results [225] Spin-off and Operational Challenges - On July 19, 2021, the company completed the spin-off of its managed service provider business, N-able, into a separately traded public company, resulting in no longer consolidating N-able's financial results [82] - The spin-off of N-able may not achieve anticipated benefits, potentially disrupting the company's business and financial condition [224] - The company may face challenges in attracting and retaining employees post-separation from N-able, impacting its operational effectiveness [224] - The separation agreements with N-able include indemnity obligations that could lead to substantial liabilities for the company [228] - The IRS could challenge the tax-free status of the N-able spin-off, leading to unexpected tax liabilities for the company and its shareholders [226] - The company may not successfully achieve its operational objectives post-separation, which could affect its market position [224]

Financial Data and Key Metrics Changes - In Q4 2022, total revenue was $187 million, a slight increase year-over-year, and above the guidance range of $178 million to $183 million [42] - Adjusted EBITDA for Q4 was $74.5 million, representing a margin of 40%, exceeding the previous outlook of 38% to 39% [21][42] - For the full year 2022, total revenue was $719 million, slightly higher than the prior year and above the guidance of $710 million to $715 million [42] - Subscription ARR as of December 31 was $175 million, a 30% increase year-over-year [19] Business Line Data and Key Metrics Changes - Subscription revenue in Q4 was $50 million, up 45% year-over-year, with full-year subscription revenue of $168 million, up 35% [118] - Maintenance revenue for Q4 was $115 million, a decrease of 3% year-over-year, and $459 million for the full year, down 4% [44] - License revenue for Q4 was $22 million, a decline of approximately 34% compared to Q4 2021, and $93 million for the full year, down 19% [45] Market Data and Key Metrics Changes - The company experienced currency headwinds, with constant currency revenue for Q4 estimated at approximately $191 million, reflecting a 2% year-over-year growth [18] - The total ARR at the end of Q4 was $636 million, up 2% year-over-year, with a constant currency increase of over 3% [43] Company Strategy and Development Direction - The company is focused on a subscription-first strategy, aiming to grow subscription ARR to over $1 billion with mid-40s adjusted EBITDA margins in the coming years [26] - The transition to subscription is seen as a way to deliver greater value to customers, despite some total revenue headwinds [34] - The company is expanding its observability solutions and enhancing its product portfolio to address the growing complexity of IT environments [37][39] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenging macro environment in 2022 but noted healthy demand and strong customer retention [39] - For 2023, the company plans to continue optimizing its expense structure while selectively investing to improve profitability [40] - The outlook for Q1 2023 includes total revenue guidance of $177 million to $182 million, representing a 1% year-over-year growth at the midpoint [23] Other Important Information - The company refinanced its debt, extending the maturity date to February 2027 and making voluntary prepayments totaling approximately $650 million [22] - Adjusted EBITDA for 2023 is expected to be approximately $290 million to $300 million, reflecting a 5% year-over-year growth at the midpoint [48] Q&A Session All Questions and Answers Question: How are SME customers thinking about cloud optimization? - Management noted that the hybrid cloud solutions provide flexibility for customers to pace their investments alongside their cloud evolution [78] Question: Can you comment on the trends in the international market, particularly in Europe? - The pipeline remains robust, but management is modeling lower pipeline conversion due to increased deal scrutiny in the macro environment [62] Question: What are the expectations for the observability solutions launched in 2022? - Initial customer success has been positive, and management is optimistic about the contributions of observability to revenue growth [122] Question: How is the company addressing the transition from maintenance to subscription? - The company is using maintenance renewals as opportunities to pitch the Hybrid Cloud Observability product, with high conversion rates observed [111]

Revenue on a Constant Currency Basis Reconciliation ($ in millions) Three Months Ended Year Ended unning ma @solarwinds 1 Forward-Looking Statements These forward-looking statements are based on management's beliefs and assumptions and on information currently available to management. Forward-looking statements include all statements that are not historical facts and may be identified by terms such as "aim," "anticipate," "believe," "can," "could," "seek," "should," "feel," "expect," "will," "would," "plan, ...

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 AC OF 1934 For the quarterly period ended September 30, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-38711 SolarWinds Corporation (Exact name of registrant as specified in its charter) Delaware 81-0753267 (State or other juris ...

Financial Data and Key Metrics Changes - For Q3 2022, total revenue was $179 million, down 1% year-over-year, but on a constant currency basis, it showed a 1% growth [11][25] - Adjusted EBITDA was $70.3 million, representing an adjusted EBITDA margin of 39% [14][32] - Total Annual Recurring Revenue (ARR) was $623 million, roughly flat compared to the prior year, with subscription ARR at $159 million, up 23% year-over-year [26][27] Business Line Data and Key Metrics Changes - Subscription revenue for Q3 was $42 million, up 31% year-over-year, reflecting the success of the subscription-first strategy [28] - Maintenance revenue was $114 million, a decrease of 4% from the prior year, impacted by the conversion of maintenance customers to subscription [29] - License revenue was $23 million, down approximately 22% compared to Q3 2021, due to the focus on subscription sales [30] Market Data and Key Metrics Changes - The federal business showed improved sales performance in Q3 compared to the previous year, with a total of 882 customers spending over $100,000 in the last 12 months, a 12% increase year-over-year [31] - The company experienced delays in deal closures in Europe, but demand remained strong across all regions [21][50] Company Strategy and Development Direction - The company is focused on a subscription-first strategy, aiming to grow annual recurring revenues to over $1 billion in the coming years [13][15] - The launch of the SolarWinds Transform Partner Program aims to enhance channel growth and development [20] - The transition from monitoring to observability solutions is a key element of the company's strategy to address customer challenges in hybrid and multi-cloud environments [17][19] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the long-term opportunity despite macroeconomic challenges and FX headwinds [22][38] - The company is focused on customer retention and expansion, maintaining a renewal rate of 91% [12][43] - Management plans to exercise expense discipline while seeking selective investment opportunities [44] Other Important Information - The company completed a voluntary debt prepayment of $300 million and expects to make additional payments to reduce gross debt [35] - A goodwill impairment of $279 million was recorded in Q3 due to the current macroeconomic environment [40] Q&A Session Summary Question: Insights on federal business performance - Management noted good growth in the federal sector due to long-term engagement and the stickiness of solutions [48] Question: Pipeline in Europe and deal closures - Management acknowledged strong demand but mentioned local conditions causing some delays in deal closures [50] Question: Update on SME spending - Management indicated that scrutiny is more prevalent in upper mid-market and enterprise segments, while SME spending remains robust [53] Question: Initial response to SolarWinds Observability - Management reported positive initial responses and emphasized the advantages of their full stack capabilities [55] Question: Partner ecosystem evolution - Management highlighted the importance of global system integrators in reaching larger digital transformation initiatives [59] Question: Sustainability of renewal rates - Management expressed confidence that the 91% renewal rate is sustainable despite macro uncertainties [61] Question: Interest expense modeling - Management indicated that interest expenses have increased due to rising rates, with a current estimate around $24 million [67]

Q3'22 Results November 3, 2022 © 2022 SolarWinds Worldwide, LLC. All rights reserved. General Disclaimer Forward-Looking Statements 2 This presentation and the accompanying oral presentation contain "forward-looking" statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial outlook, our market opportunities, our expectations regarding customer retention and our evolution to a subscription first mentality, ...

PART I - FINANCIAL INFORMATION [Item 1. Financial Statements](index=6&type=section&id=Item%201.%20Financial%20Statements) This section presents the company's unaudited condensed consolidated financial statements and accompanying notes [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20as%20of%20June%2030%2C%202022%20and%20December%2031%2C%202021) Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $722,440 | $732,116 | | Short-term investments | $55,768 | — | | Total current assets | $885,974 | $858,840 | | Goodwill | $2,642,388 | $3,308,405 | | Total assets | $4,078,561 | $4,792,127 | | **Liabilities & Equity** | | | | Total current liabilities | $411,991 | $413,877 | | Long-term debt, net of current portion | $1,865,270 | $1,870,769 | | Total liabilities | $2,460,754 | $2,504,231 | | Total stockholders' equity | $1,617,807 | $2,287,896 | | Total liabilities and stockholders' equity | $4,078,561 | $4,792,127 | - Goodwill decreased significantly from $3,308,405 thousand to $2,642,388 thousand, primarily due to a **$612.4 million impairment charge**[17](index=17&type=chunk)[71](index=71&type=chunk) - Total stockholders' equity decreased from $2,287,896 thousand to $1,617,807 thousand, largely driven by the **net loss** and **foreign currency translation adjustments**[17](index=17&type=chunk)[24](index=24&type=chunk) [Condensed Consolidated Statements of Operations](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20for%20the%20three%20and%20six%20month%20periods%20ended%20June%2030%2C%202022%20and%202021) Condensed Consolidated Statements of Operations (in thousands, except per share) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $176,034 | $176,788 | $352,902 | $350,644 | | Gross profit | $156,926 | $120,962 | $298,736 | $238,747 | | Operating loss | $(596,578) | $(7,546) | $(585,137) | $(18,688) | | Net loss | $(622,124) | $(11,624) | $(626,783) | $(18,784) | | Basic loss per share | $(3.87) | $(0.07) | $(3.91) | $(0.12) | - Total revenue remained **relatively stable** year-over-year for both the three and six-month periods ended June 30, 2022[19](index=19&type=chunk)[139](index=139&type=chunk)[157](index=157&type=chunk) - The company reported a significant increase in net loss, primarily driven by a **$612.4 million goodwill impairment charge** recognized in the second quarter of 2022[19](index=19&type=chunk)[43](index=43&type=chunk)[152](index=152&type=chunk)[168](index=168&type=chunk) [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)%20for%20the%20three%20and%20six%20month%20periods%20ended%20June%2030%2C%202022%20and%202021) Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(622,124) | $(11,624) | $(626,783) | $(18,784) | | Foreign currency translation adjustment | $(53,670) | $17,645 | $(70,565) | $(48,105) | | Unrealized losses on investments, net of tax | $(152) | — | $(152) | — | | Other comprehensive income (loss) | $(53,822) | $17,645 | $(70,717) | $(48,105) | | Comprehensive income (loss) | $(675,946) | $6,021 | $(697,500) | $(66,889) | - Comprehensive loss widened significantly in 2022 due to the increased net loss and substantial **negative foreign currency translation adjustments**[21](index=21&type=chunk)[140](index=140&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity%20for%20the%20three%20and%20six%20month%20periods%20ended%20June%2030%2C%202022%20and%202021) Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Balance at Dec 31, 2021 | Balance at June 30, 2022 | | :--- | :--- | :--- | | Common Stock (Amount) | $159 | $161 | | Additional Paid-in Capital | $2,566,783 | $2,594,192 | | Accumulated Other Comprehensive Income (Loss) | $1,306 | $(69,411) | | Accumulated Deficit | $(280,352) | $(907,135) | | Total Stockholders' Equity | $2,287,896 | $1,617,807 | - Total stockholders' equity decreased by **$670,089 thousand** from December 31, 2021, to June 30, 2022, due to a net loss and foreign currency translation adjustments[24](index=24&type=chunk)[25](index=25&type=chunk) - Stock-based compensation contributed **$33,276 thousand** to additional paid-in capital for the six months ended June 30, 2022[24](index=24&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=11&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20six%20month%20periods%20ended%20June%2030%2C%202022%20and%202021) Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities from continuing operations | $81,440 | $48,213 | | Net cash used in investing activities from continuing operations | $(73,426) | $(6,491) | | Net cash used in financing activities from continuing operations | $(16,081) | $(16,479) | | Net cash provided by discontinued activities | — | $18,347 | | Net increase (decrease) in cash and cash equivalents | $(9,676) | $40,137 | | Cash and cash equivalents, End of period | $722,440 | $410,635 | - Net cash from operating activities increased to **$81,440 thousand**, primarily due to changes in operating assets and liabilities and **$5.0 million** in Cyber Incident insurance proceeds[28](index=28&type=chunk)[196](index=196&type=chunk) - Net cash used in investing activities increased to **$73,426 thousand**, mainly due to **$55.9 million** in short-term investments purchases and an acquisition[28](index=28&type=chunk)[198](index=198&type=chunk) [Notes to the Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) [1. Organization and Nature of Operations](index=12&type=section&id=1.%20Organization%20and%20Nature%20of%20Operations) - SolarWinds Corporation is a leading provider of IT management software for hybrid IT environments[30](index=30&type=chunk) - The company completed the spin-off of its N-able business on July 19, 2021, with N-able's results now reported as **discontinued operations**[31](index=31&type=chunk) [2. Summary of Significant Accounting Policies](index=12&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) - The company early adopted ASU No 2021-08 for business combination accounting, which did not materially impact financial statements[38](index=38&type=chunk) - A **$612.4 million non-cash goodwill impairment charge** was recognized due to a decline in market capitalization and lowered projected operating results[42](index=42&type=chunk)[43](index=43&type=chunk) - A **$9.4 million non-cash impairment charge** was recorded for the SolarWinds trade name as of June 30, 2022[47](index=47&type=chunk) Amortization of Acquired Technologies (in thousands) | Period | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Acquired license technologies | $921 | $37,328 | $15,404 | $74,664 | | Acquired subscription technologies | $2,727 | $2,770 | $5,471 | $5,851 | | Total amortization | $3,648 | $40,098 | $20,875 | $80,515 | - Amortization of acquired license technologies **significantly decreased** in 2022 as certain intangible assets became fully amortized[62](index=62&type=chunk) [3. Discontinued Operations](index=16&type=section&id=3.%20Discontinued%20Operations) - The N-able business results are presented as discontinued operations for periods up to its separation on July 19, 2021[64](index=64&type=chunk) N-able Discontinued Operations (in thousands) | Metric | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Total revenue | $85,186 | $168,232 | | Operating income | $10,837 | $19,977 | | Net income from discontinued operations, net of tax | $10,261 | $24,881 | - Spin-off costs related to the Separation were **$0.2 million** for H1 2022, down from **$23.1 million** in the prior year period[66](index=66&type=chunk) [4. Investments](index=17&type=section&id=4.%20Investments) - As of June 30, 2022, SolarWinds held **$55.8 million** in short-term available-for-sale securities[67](index=67&type=chunk)[70](index=70&type=chunk) Short-term Investments as of June 30, 2022 (in thousands) | Type | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | :--- | :--- | :--- | :--- | :--- | | U.S. Treasury securities | $23,958 | $— | $(72) | $23,886 | | Corporate bonds | $22,034 | $10 | $(121) | $21,923 | | Commercial paper | $8,959 | $— | $— | $8,959 | | Asset-backed securities | $1,003 | $— | $(3) | $1,000 | | Total | $55,954 | $10 | $(196) | $55,768 | [5. Goodwill](index=18&type=section&id=5.%20Goodwill) Changes in Goodwill (in thousands) | Metric | Amount | | :--- | :--- | | Balance at December 31, 2021 | $3,308,405 | | Acquisitions | $5,415 | | Goodwill impairment | $(612,395) | | Foreign currency translation and other adjustments | $(59,037) | | Balance at June 30, 2022 | $2,642,388 | - Goodwill decreased by **$666,017 thousand** during H1 2022, primarily due to a **$612.4 million impairment charge** and negative foreign currency adjustments[71](index=71&type=chunk) [6. Fair Value Measurements](index=19&type=section&id=6.%20Fair%20Value%20Measurements) Fair Value Measurements at June 30, 2022 (in thousands) | Asset Type | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Money market funds | $361,055 | — | — | $361,055 | | U.S. Treasury securities | — | $31,380 | — | $31,380 | | Corporate bonds | — | $23,707 | — | $23,707 | | Commercial paper | — | $42,805 | — | $42,805 | | Asset-backed securities | — | $1,000 | — | $1,000 | | Total assets | $361,055 | $98,892 | — | $459,947 | - The company recognized non-recurring impairment charges of **$612.4 million** for goodwill and **$9.4 million** for its trade name, classified as **Level 3** fair value measurements[75](index=75&type=chunk) [7. Debt](index=20&type=section&id=7.%20Debt) Debt Summary (in thousands, except interest rates) | Metric | June 30, 2022 | Effective Rate | December 31, 2021 | Effective Rate | | :--- | :--- | :--- | :--- | :--- | | First Lien Term Loan | $1,899,400 | 4.42% | $1,909,350 | 2.85% | | Total principal amount | $1,899,400 | | $1,909,350 | | | Total debt | $1,885,170 | | $1,890,669 | | | Long-term debt, net of current portion | $1,865,270 | | $1,870,769 | | - The First Lien Term Loan's effective interest rate increased from **2.85%** to **4.42%** at June 30, 2022[77](index=77&type=chunk) - The company was in compliance with all debt covenants as of June 30, 2022[82](index=82&type=chunk) [8. Earnings (Loss) Per Share](index=21&type=section&id=8.%20Earnings%20(Loss)%20Per%20Share) Basic and Diluted Loss Per Share (in thousands, except per share) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss from continuing operations | $(622,124) | $(21,885) | $(626,783) | $(43,665) | | Basic loss from continuing operations per share | $(3.87) | $(0.14) | $(3.91) | $(0.28) | | Diluted loss from continuing operations per share | $(3.87) | $(0.14) | $(3.91) | $(0.28) | | Weighted-average shares used in basic EPS | 160,663 | 157,854 | 160,257 | 157,491 | | Total anti-dilutive shares excluded | 12,594 | 7,071 | 11,074 | 6,613 | - Basic and diluted loss per share from continuing operations significantly increased to **$(3.87)** for Q2 and **$(3.91)** for H1 2022, primarily due to the goodwill impairment charge[19](index=19&type=chunk)[84](index=84&type=chunk) [9. Income Taxes](index=22&type=section&id=9.%20Income%20Taxes) Income Tax Expense (Benefit) and Effective Tax Rate | Period | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Income tax expense (benefit) | $7,871 | $(2,121) | $7,715 | $(7,001) | | Effective tax rate | (1.3)% | 8.8% | (1.2)% | 13.8% | - The effective tax rate decreased significantly to **(1.2)%** for H1 2022, primarily due to the **non-deductible goodwill impairment charge**[87](index=87&type=chunk) - The company increased its valuation allowance for deferred tax assets during the second quarter of 2022[89](index=89&type=chunk) [10. Commitment and Contingencies](index=22&type=section&id=10.%20Commitment%20and%20Contingencies) - Pretax gross expenses related to the Cyber Incident were **$3.7 million** for Q2 2022 and **$9.5 million** for H1 2022, a decrease from the prior year[92](index=92&type=chunk)[93](index=93&type=chunk) - The company is subject to multiple lawsuits and government investigations related to the Cyber Incident[95](index=95&type=chunk)[97](index=97&type=chunk)[98](index=98&type=chunk) - SolarWinds maintains **$15 million** in cybersecurity insurance and has received **$15 million** in proceeds as of June 30, 2022[101](index=101&type=chunk) - SolarWinds indemnifies N-able for liabilities related to the Cyber Incident under the separation agreement[102](index=102&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of financial performance, operational highlights, and key business factors [Overview](index=24&type=section&id=Overview) - SolarWinds is a leading provider of IT management software, focusing on an 'inside-first' sales model for hybrid IT environments[106](index=106&type=chunk) - The company aims to innovate and invest in its product portfolio across network, systems, applications, and IT service desks[107](index=107&type=chunk) [Spin-Off of N-able Business](index=24&type=section&id=Spin-Off%20of%20N-able%20Business) - The spin-off of the N-able business was completed on July 19, 2021, and its historical results are reported as **discontinued operations**[109](index=109&type=chunk) - Spin-off costs decreased significantly to **$0.2 million** for H1 2022 from **$23.1 million** in the prior year[110](index=110&type=chunk) [Cyber Incident](index=24&type=section&id=Cyber%20Incident) - SolarWinds continues extensive remediation measures, including its 'Secure by Design' initiative[112](index=112&type=chunk) - Pretax gross expenses related to the Cyber Incident were **$9.5 million** for H1 2022, compared to **$34.0 million** in H1 2021[113](index=113&type=chunk)[114](index=114&type=chunk) - Ongoing 'Secure By Design' initiatives have increased annual expenses by approximately **$20 million**[115](index=115&type=chunk) - The company expects to incur additional legal and professional costs and is subject to multiple lawsuits and investigations[116](index=116&type=chunk)[117](index=117&type=chunk) - SolarWinds maintains **$15 million** in cybersecurity insurance and **$50 million** in D&O liability insurance[119](index=119&type=chunk) [Impacts of COVID-19](index=26&type=section&id=Impacts%20of%20COVID-19) - The company does not expect a significant ongoing impact on financial results from the COVID-19 pandemic based on current conditions[120](index=120&type=chunk) [Impacts of Macroeconomic Conditions](index=26&type=section&id=Impacts%20of%20Macroeconomic%20Conditions) - Foreign currency fluctuations, inflation, and interest rate changes have negatively impacted financial results and may continue to do so[121](index=121&type=chunk)[140](index=140&type=chunk) - The suspension of business in Russia and Belarus is not expected to have a material impact on financial results[121](index=121&type=chunk) [Second Quarter Highlights](index=26&type=section&id=Second%20Quarter%20Highlights) [Customers](index=26&type=section&id=Customers) - As of June 30, 2022, SolarWinds had over **300,000 customers**, with **879** spending over $100,000 annually, up from 775 in the prior year[123](index=123&type=chunk) [Annual Recurring Revenue (ARR)](index=26&type=section&id=Annual%20Recurring%20Revenue%20(ARR)) Annual Recurring Revenue (in thousands, except percentages) | Metric | June 30, 2022 | June 30, 2021 | Year-over-Year Growth | | :--- | :--- | :--- | :--- | | Subscription ARR | $148,277 | $119,189 | 24.4% | | Total ARR | $625,496 | $621,072 | 0.7% | - Subscription ARR grew by **24.4%** year-over-year, driven by sales of subscription offerings and customer transitions[126](index=126&type=chunk)[128](index=128&type=chunk) - Total ARR increased slightly by **0.7%**, with subscription growth partially offset by a decline in maintenance contracts[126](index=126&type=chunk)[128](index=128&type=chunk) [Components of Our Results of Operations](index=27&type=section&id=Components%20of%20Our%20Results%20of%20Operations) - Revenue consists of recurring (subscription and maintenance) and perpetual license revenue, with a planned shift towards subscriptions[129](index=129&type=chunk)[131](index=131&type=chunk) - Operating expenses are expected to increase due to long-term investments and dis-synergies from the N-able separation[134](index=134&type=chunk) - Interest expense is expected to continue increasing due to anticipated interest rate hikes on variable-rate debt[135](index=135&type=chunk) [Comparison of the Three Months Ended June 30, 2022 and 2021](index=29&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20June%2030%2C%202022%20and%202021) Revenue (in thousands, except percentages) | Revenue Type | Q2 2022 Amount | Q2 2022 % of Revenue | Q2 2021 Amount | Q2 2021 % of Revenue | Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Subscription | $36,980 | 21.0% | $29,608 | 16.7% | $7,372 | | Maintenance | $113,972 | 64.8% | $120,502 | 68.2% | $(6,530) | | Total recurring | $150,952 | 85.8% | $150,110 | 84.9% | $842 | | License | $25,082 | 14.2% | $26,678 | 15.1% | $(1,596) | | Total revenue | $176,034 | 100.0% | $176,788 | 100.0% | $(754) | - Total revenue decreased by **$0.8 million (0.4%)** due to lower license and maintenance revenue, offset by a **24.9% increase** in subscription revenue[139](index=139&type=chunk)[141](index=141&type=chunk) - Subscription net retention rate was **97%** for the trailing twelve months ended June 30, 2022[142](index=142&type=chunk) - Maintenance revenue decreased by **5.4%** due to decreased license sales, customer transitions, and foreign currency impact[143](index=143&type=chunk)[144](index=144&type=chunk) Operating Expenses (in thousands, except percentages) | Expense Type | Q2 2022 Amount | Q2 2022 % of Revenue | Q2 2021 Amount | Q2 2021 % of Revenue | Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $64,615 | 36.7% | $58,076 | 32.9% | $6,539 | | Research and development | $22,108 | 12.6% | $25,831 | 14.6% | $(3,723) | | General and administrative | $41,283 | 23.5% | $30,719 | 17.4% | $10,564 | | Amortization of acquired intangibles | $13,103 | 7.4% | $13,882 | 7.8% | $(779) | | Goodwill impairment | $612,395 | 347.9% | — | — | $612,395 | | Total operating expenses | $753,504 | 428.0% | $128,508 | 72.7% | $624,996 | - General and administrative expenses increased by **34.4%** due to a **$9.4 million trade name impairment charge** and higher personnel costs[150](index=150&type=chunk) - Interest expense, net, increased by **13.6%** due to higher interest rates on debt[153](index=153&type=chunk) - Income tax expense was **$7.9 million** (effective rate of -1.3%) in Q2 2022, primarily due to the non-deductible goodwill impairment[155](index=155&type=chunk) [Comparison of the Six Months Ended June 30, 2022 and 2021](index=32&type=section&id=Comparison%20of%20the%20Six%20Months%20Ended%20June%2030%2C%202022%20and%202021) Revenue (in thousands, except percentages) | Revenue Type | H1 2022 Amount | H1 2022 % of Revenue | H1 2021 Amount | H1 2021 % of Revenue | Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Subscription | $75,727 | 21.5% | $57,925 | 16.5% | $17,802 | | Maintenance | $229,467 | 65.0% | $241,167 | 68.8% | $(11,700) | | Total recurring | $305,194 | 86.5% | $299,092 | 85.3% | $6,102 | | License | $47,708 | 13.5% | $51,552 | 14.7% | $(3,844) | | Total revenue | $352,902 | 100.0% | $350,644 | 100.0% | $2,258 | - Total revenue increased by **$2.3 million (0.6%)** for H1 2022, driven by a **30.7% increase** in subscription revenue[157](index=157&type=chunk)[158](index=158&type=chunk) - Maintenance revenue decreased by **4.9%** due to lower license sales, customer transitions, and foreign currency impacts[159](index=159&type=chunk) Operating Expenses (in thousands, except percentages) | Expense Type | H1 2022 Amount | H1 2022 % of Revenue | H1 2021 Amount | H1 2021 % of Revenue | Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $125,659 | 35.6% | $115,742 | 33.0% | $9,917 | | Research and development | $45,530 | 12.9% | $52,189 | 14.9% | $(6,659) | | General and administrative | $73,947 | 21.0% | $61,584 | 17.6% | $12,363 | | Amortization of acquired intangibles | $26,342 | 7.5% | $27,920 | 7.9% | $(1,578) | | Goodwill impairment | $612,395 | 173.5% | — | — | $612,395 | | Total operating expenses | $883,873 | 250.5% | $257,435 | 73.4% | $626,438 | - General and administrative expenses increased by **20.1%** due to a **$9.4 million trade name impairment** and higher personnel costs[166](index=166&type=chunk) - Income tax expense was **$7.7 million** (effective rate of -1.2%) in H1 2022, primarily due to the non-deductible goodwill impairment[171](index=171&type=chunk) [Non-GAAP Financial Measures from Continuing Operations](index=36&type=section&id=Non-GAAP%20Financial%20Measures%20from%20Continuing%20Operations) - SolarWinds uses non-GAAP measures like Non-GAAP Operating Income and Adjusted EBITDA to supplement its GAAP results[174](index=174&type=chunk)[178](index=178&type=chunk)[182](index=182&type=chunk) Non-GAAP Operating Income and Margin (in thousands, except percentages) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | GAAP operating loss | $(596,578) | $(7,546) | $(585,137) | $(18,688) | | Non-GAAP operating income | $63,347 | $72,896 | $128,498 | $142,640 | | Non-GAAP operating margin | 36.0% | 41.2% | 36.4% | 40.7% | Adjusted EBITDA and Margin (in thousands, except percentages) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss from continuing operations | $(622,124) | $(21,885) | $(626,783) | $(43,665) | | Adjusted EBITDA | $66,824 | $76,726 | $135,614 | $149,676 | | Adjusted EBITDA margin | 38.0% | 43.4% | 38.4% | 42.7% | [Liquidity and Capital Resources](index=39&type=section&id=Liquidity%20and%20Capital%20Resources) - Cash, cash equivalents, and short-term investments totaled **$778.2 million** as of June 30, 2022[186](index=186&type=chunk) - The company believes existing cash and operating cash flows are sufficient to fund operations for at least the next 12 months[187](index=187&type=chunk) - Total indebtedness was **$1.9 billion** as of June 30, 2022, with **$117.5 million** available under the revolving credit facility[189](index=189&type=chunk) Summary of Cash Flows (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities from continuing operations | $81,440 | $48,213 | | Net cash used in investing activities from continuing operations | $(73,426) | $(6,491) | | Net cash used in financing activities from continuing operations | $(16,081) | $(16,479) | | Net increase (decrease) in cash and cash equivalents | $(9,676) | $40,137 | - Net cash provided by operating activities increased due to changes in operating assets and liabilities, including **$5.0 million** in insurance proceeds[196](index=196&type=chunk) - Net cash used in investing activities increased significantly due to **$55.9 million** in short-term investments and an acquisition[198](index=198&type=chunk) [Critical Accounting Policies and Estimates](index=41&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) - Key accounting estimates include valuation of goodwill, intangibles, revenue recognition, and loss contingencies[206](index=206&type=chunk) - An interim goodwill impairment assessment resulted in a **$612.4 million non-cash charge**, using income and market approaches with an **11.5% discount rate**[209](index=209&type=chunk)[210](index=210&type=chunk) - A **$9.4 million non-cash impairment charge** was recorded for the SolarWinds trade name, using a relief from royalty method[213](index=213&type=chunk) [Item 3. Quantitative and Qualitative Disclosures of Market Risk](index=43&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20of%20Market%20Risk) This section details the company's exposure to market risks, primarily interest rate and foreign currency fluctuations [Interest Rate Risk](index=43&type=section&id=Interest%20Rate%20Risk) - The company held **$722.4 million** in cash and cash equivalents and **$55.8 million** in short-term investments with minimal market risk[216](index=216&type=chunk)[217](index=217&type=chunk) - Total indebtedness was **$1.90 billion** with variable interest rates; a hypothetical **100 basis point increase** would impact annual interest expense by **$19.1 million**[218](index=218&type=chunk) [Foreign Currency Exchange Risk](index=43&type=section&id=Foreign%20Currency%20Exchange%20Risk) - SolarWinds is exposed to foreign currency fluctuations, primarily in the Euro, British Pound Sterling, and Australian Dollar[220](index=220&type=chunk) - The company uses foreign currency forward contracts to minimize exposure but had no outstanding contracts as of June 30, 2022[224](index=224&type=chunk)[225](index=225&type=chunk) - Currency fluctuations impact the translation of foreign subsidiaries' financial statements into USD[227](index=227&type=chunk) [Item 4. Controls and Procedures](index=44&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of disclosure controls and procedures as of the reporting date - As of June 30, 2022, disclosure controls and procedures were deemed **effective** at a reasonable assurance level by management[228](index=228&type=chunk)[229](index=229&type=chunk) - There were **no material changes** in internal control over financial reporting during the quarter ended June 30, 2022[230](index=230&type=chunk) PART II - OTHER INFORMATION [Item 1. Legal Proceedings](index=45&type=section&id=Item%201.%20Legal%20Proceedings) This section outlines ongoing lawsuits and government investigations related to the Cyber Incident - The company is involved in lawsuits and government investigations related to the Cyber Incident, as detailed in Note 10 and Item 2[233](index=233&type=chunk) - While other legal proceedings may arise, none are currently considered material, though outcomes are uncertain[234](index=234&type=chunk) [Item 1A. Risk Factors](index=45&type=section&id=Item%201A.%20Risk%20Factors) This section updates key risk factors, focusing on cybersecurity vulnerabilities and the Cyber Incident's impact - The primary updated risk factor concerns **cybersecurity and the Cyber Incident**, emphasizing ongoing vulnerabilities and potential harms[235](index=235&type=chunk)[236](index=236&type=chunk)[239](index=239&type=chunk) - Cyberattacks can lead to system compromises, theft of information, operational interference, and exposure to legal liabilities[236](index=236&type=chunk)[237](index=237&type=chunk)[239](index=239&type=chunk) - The company's cybersecurity insurance coverage of **$15 million** may not be sufficient for all liabilities[239](index=239&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=46&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports on issuer repurchases of equity securities from employees during the quarter Issuer Purchases of Equity Securities (in thousands, except per share) | Period | Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | | :--- | :--- | :--- | :--- | | April 1-30, 2022 | — | $— | — | | May 1-31, 2022 | — | $— | — | | June 1-30, 2022 | 6,750 | $4.00 | — | | Total | 6,750 | | — | - All repurchases relate to employee-held restricted stock and were not part of a publicly announced program[240](index=240&type=chunk) [Item 6. Exhibits](index=47&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the quarterly report, including certifications and corporate documents - Exhibits include the Certificate of Incorporation, Bylaws, and certifications from the CEO and CFO[243](index=243&type=chunk) - Certifications are filed as required by the Exchange Act Rules and the Sarbanes-Oxley Act[243](index=243&type=chunk) [Signatures](index=48&type=section&id=Signatures) This section contains the official signature certifying the filing of the report on behalf of the company - The report is signed by J Barton Kalsu, Chief Financial Officer, on August 5, 2022[247](index=247&type=chunk)

Financial Data and Key Metrics Changes - Total revenue for Q2 2022 was $176 million, near the high end of the guidance range of $174 million to $177 million, reflecting a slight decline compared to the prior year [28] - On a constant currency basis, total revenue would have been approximately $180 million, representing a 2% year-over-year increase [28] - Adjusted EBITDA was $67 million, with an adjusted EBITDA margin of 38%, consistent with the outlook provided [37] - Subscription revenue for Q2 2022 was $37 million, up 25% year-over-year, indicating successful subscription-first efforts [30] - Total ARR as of June 30, 2022, was $625 million, showing a slight increase over the prior year [35] Business Line Data and Key Metrics Changes - Subscription revenue growth reflects the conversion of maintenance customers to hybrid observability subscriptions, with maintenance revenue at $114 million, down 5% year-over-year [31] - License revenue was $25.1 million, representing a decline of approximately 6% compared to Q2 2021 [34] - In-quarter renewal rates were 93%, with trailing 12-month renewal rates at 91%, indicating strong customer retention [13][33] Market Data and Key Metrics Changes - The company experienced a foreign exchange headwind, particularly with the euro's decline against the U.S. dollar, impacting revenue performance [28][44] - Central Europe was identified as a soft spot due to geopolitical factors, but demand remained robust in other regions [62] Company Strategy and Development Direction - The company is focused on a subscription-first mentality, transitioning from on-premises to hybrid and SaaS solutions [26][50] - Plans to extend the SolarWinds platform into service management, integrating observability and service management to address customer needs [19] - The company aims to enhance partnerships with global system integrators and hyperscalers to drive growth [17][92] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the company's ability to navigate macroeconomic challenges, emphasizing the relevance of their solutions [54] - The outlook for Q3 2022 anticipates total revenue in the range of $180 million to $185 million, with adjusted EBITDA margin expected to be approximately 39% to 40% [41][43] - Full-year revenue guidance was lowered to $715 million to $725 million due to macroeconomic factors and currency fluctuations [46] Other Important Information - A noncash goodwill impairment charge of $612 million was recognized for the quarter due to a decline in market capitalization and financial forecast adjustments [51] - The company is committed to improving supply chain security and software security processes through its next-generation billing system [108] Q&A Session Summary Question: Can you provide more color on the macro backdrop and product performance? - Management noted that foreign exchange remains a significant concern, particularly in Central Europe, but product reception for hybrid cloud observability and service management solutions has been robust [60][62] Question: What are the assumptions for renewal rates moving forward? - Management expects renewal rates to remain in the 90% to 91% range, with any improvement providing upside [66] Question: How did demand progress throughout the quarter? - Demand remained robust relative to historical levels, with no significant deceleration noted as the quarter ended [70] Question: What is the contribution from federal customers? - Federal business is estimated to be closer to 10% of total revenue, with no significant changes expected [101] Question: How is the partner ecosystem evolving? - The company is expanding its partner relationships, focusing on both global system integrators and traditional partners to enhance sales efforts [88][92]

PART I - FINANCIAL INFORMATION [Item 1. Financial Statements](index=6&type=section&id=Item%201.%20Financial%20Statements) Presents the company's unaudited condensed consolidated financial statements for the first quarters of 2022 and 2021 [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Details the company's financial position with key assets, liabilities, and stockholders' equity as of March 31, 2022 | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Total Assets | $4,761,749 | $4,792,127 | $(30,378) | | Total Liabilities | $2,484,371 | $2,504,231 | $(19,860) | | Total Stockholders' Equity | $2,277,378 | $2,287,896 | $(10,518) | | Cash and cash equivalents | $751,218 | $732,116 | $19,102 | | Goodwill | $3,299,468 | $3,308,405 | $(8,937) | | Long-term debt, net | $1,868,010 | $1,870,769 | $(2,759) | [Condensed Consolidated Statements of Operations](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Summarizes revenues, expenses, and net loss for the first quarters of 2022 and 2021 | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | YoY Change (%) | | :---------------------------------- | :------------------ | :------------------ | :-------------------- | :------------- | | Total Revenue | $176,868 | $173,856 | $3,012 | 1.7% | | Subscription Revenue | $38,747 | $28,317 | $10,430 | 36.8% | | Maintenance Revenue | $115,495 | $120,665 | $(5,170) | -4.3% | | License Revenue | $22,626 | $24,874 | $(2,248) | -9.0% | | Gross Profit | $141,810 | $117,785 | $24,025 | 20.4% | | Operating Income (Loss) | $11,441 | $(11,142) | $22,583 | N/A | | Net Loss from Continuing Operations | $(4,659) | $(21,780) | $17,121 | N/A | | Net Loss | $(4,659) | $(7,160) | $2,501 | N/A | | Basic Loss Per Share | $(0.03) | $(0.05) | $0.02 | N/A | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) Reports net loss and other comprehensive income items, including foreign currency translation adjustments | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :------------------------------ | :------------------ | :------------------ | :-------------------- | | Net Loss | $(4,659) | $(7,160) | $2,501 | | Foreign currency translation adjustment | $(16,895) | $(65,750) | $48,855 | | Comprehensive Income (Loss) | $(21,554) | $(72,910) | $51,356 | [Condensed Consolidated Statements of Stockholders' Equity](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) Details the changes in stockholders' equity during the first quarter of 2022 | Metric | Balance at Dec 31, 2021 (in thousands) | Changes (in thousands) | Balance at Mar 31, 2022 (in thousands) | | :-------------------------------- | :----------------------------------- | :--------------------- | :----------------------------------- | | Total Stockholders' Equity | $2,287,896 | $(10,518) | $2,277,378 | | Foreign currency translation adjustment | $1,306 | $(16,895) | $(15,589) | | Net loss | $(280,352) | $(4,659) | $(285,011) | | Stock-based compensation | N/A | $15,462 | N/A | [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Summarizes cash flows from operating, investing, and financing activities for the first quarters of 2022 and 2021 | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------------------------------------- | :------------------ | :------------------ | :-------------------- | | Net cash provided by operating activities from continuing operations | $40,258 | $15,965 | $24,293 | | Net cash used in investing activities from continuing operations | $(10,800) | $(3,868) | $(6,932) | | Net cash used in financing activities from continuing operations | $(9,629) | $(10,423) | $794 | | Net increase in cash and cash equivalents | $19,102 | $3,854 | $15,248 | | Cash and cash equivalents, End of period | $751,218 | $374,352 | $376,866 | [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Provides detailed explanations of significant accounting policies, discontinued operations, goodwill, debt, and contingencies [1. Organization and Nature of Operations](index=11&type=section&id=1.%20Organization%20and%20Nature%20of%20Operations) Describes the company's business model and the recent spin-off of its N-able managed service provider business - SolarWinds Corporation is a leading provider of simple, powerful, and secure IT management software, serving organizations of all sizes with a "customer-driven products with an 'inside-first' selling motion" approach[29](index=29&type=chunk) - On July 19, 2021, the company completed the spin-off of its managed service provider (N-able) business into a separate public company, N-able, Inc, with N-able's historical financial results now reported as **discontinued operations**[30](index=30&type=chunk) [2. Summary of Significant Accounting Policies](index=11&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) Outlines the basis of preparation for the interim financial statements and key accounting policies like goodwill impairment - Interim condensed consolidated financial statements are prepared in conformity with GAAP and SEC regulations, are unaudited, and include normal adjustments; they should be read with the Annual Report on Form 10-K for the year ended December 31, 2021[31](index=31&type=chunk)[32](index=32&type=chunk) - Effective July 30, 2021, a **2:1 reverse stock split** was effected, and all share and per share figures have been retroactively restated[33](index=33&type=chunk) - The company early adopted ASU No 2021-08 "Business Combinations" as of January 1, 2022, which did not have a material impact on Q1 2022 financial statements[35](index=35&type=chunk)[37](index=37&type=chunk) - Goodwill is tested for impairment annually on October 1st or when circumstances indicate, with the latest quantitative assessment as of December 31, 2021, showing **fair value exceeded carrying value by 7.2%**, thus no impairment was recognized[38](index=38&type=chunk)[39](index=39&type=chunk) - As of March 31, 2022, despite a further decline in market capitalization, no impairment indicators were identified, but future impairment charges are possible if cash flow assumptions are not realized or stock price declines persist[40](index=40&type=chunk)[41](index=41&type=chunk) Deferred Revenue Summary | Metric | Balance at Dec 31, 2021 | Deferred revenue recognized | Additional amounts deferred | Deferred revenue acquired | Balance at Mar 31, 2022 | | :-------------------------- | :---------------------- | :-------------------------- | :------------------------ | :------------------------ | :---------------------- | | Total Deferred Revenue | $362,669 | $(125,297) | $126,840 | $263 | $364,475 | Amortization of Acquired Technologies | Type | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Amortization of acquired license technologies | $14,483 | $37,336 | $(22,853) | | Amortization of acquired subscription technologies | $2,744 | $3,081 | $(337) | | Total amortization of acquired technologies | $17,227 | $40,417 | $(23,190) | [3. Discontinued Operations](index=14&type=section&id=3.%20Discontinued%20Operations) Presents the financial results of the spun-off N-able business, which are now classified as discontinued operations - The N-able business spin-off was completed on July 19, 2021, and its results are presented as discontinued operations for periods up to that date[51](index=51&type=chunk)[52](index=52&type=chunk) - Spin-off costs were **$0.2 million in Q1 2022** and **$9.9 million in Q1 2021**, with 2021 costs primarily reflected in discontinued operations[55](index=55&type=chunk) N-able Discontinued Operations Summary (Q1 2021) | Metric | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Total Revenue | $83,046 | | Operating income from discontinued operations | $9,140 | | Net income from discontinued operations, net of tax | $14,620 | [4. Goodwill](index=15&type=section&id=4.%20Goodwill) Details the changes in the company's goodwill balance during the first quarter of 2022 | Metric | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Balance at December 31, 2021 | $3,308,405 | | Acquisitions | $5,422 | | Foreign currency translation and other adjustments | $(14,359) | | Balance at March 31, 2022 | $3,299,468 | [5. Fair Value Measurements](index=16&type=section&id=5.%20Fair%20Value%20Measurements) Outlines the methodology for fair value measurements and reports the fair value of financial assets and liabilities - The company applies a three-tiered fair value hierarchy (Level 1, 2, 3) for financial assets and liabilities[43](index=43&type=chunk) - The carrying value of long-term debt approximates its estimated fair value due to adjustable interest rates[59](index=59&type=chunk) Money Market Funds (Level 1) | Asset | March 31, 2022 (Level 1) | December 31, 2021 (Level 1) | | :---------------- | :----------------------- | :------------------------ | | Money market funds | $475,000 | $645,000 | [6. Debt](index=16&type=section&id=6.%20Debt) Provides details on the company's outstanding debt, including its First Lien Credit Agreement and interest rates - The company's First Lien Credit Agreement includes a **$1.99 billion First Lien Term Loan** due February 2024 and a **$117.5 million Revolving Credit Facility** due August 2023[61](index=61&type=chunk) - Borrowings bear floating interest rates (Eurodollar or base rate plus margin) with a **0.0% LIBOR floor**; the First Lien Term Loan requires quarterly repayments of **0.25%** of the original principal[63](index=63&type=chunk)[64](index=64&type=chunk)[66](index=66&type=chunk) - As of March 31, 2022, the company was in compliance with all covenants of the First Lien Credit Agreement[67](index=67&type=chunk) Debt Summary | Metric | March 31, 2022 | December 31, 2021 | | :------------------------------------ | :------------- | :---------------- | | First Lien Term Loan (principal) | $1,904,375 | $1,909,350 | | Effective Rate (First Lien Term Loan) | 3.21% | 2.85% | | Total debt | $1,887,910 | $1,890,669 | | Total long-term debt | $1,868,010 | $1,870,769 | [7. Earnings (Loss) Per Share](index=17&type=section&id=7.%20Earnings%20(Loss)%20Per%20Share) Presents the calculation of basic and diluted earnings per share from continuing operations and for the total net loss - **9.6 million** and **6.6 million** weighted-average outstanding shares of common stock equivalents were excluded from diluted EPS computation for Q1 2022 and Q1 2021, respectively, due to their anti-dilutive effect[70](index=70&type=chunk) Earnings (Loss) Per Share Summary | Metric | 2022 | 2021 | | :------------------------------------------ | :--- | :--- | | Basic loss from continuing operations per share | $(0.03) | $(0.14) | | Basic loss per share | $(0.03) | $(0.05) | | Diluted loss from continuing operations per share | $(0.03) | $(0.14) | | Diluted loss per share | $(0.03) | $(0.05) | | Weighted-average common shares outstanding (basic) | 159,847 | 157,123 | [8. Income Taxes](index=18&type=section&id=8.%20Income%20Taxes) Details the components of the income tax benefit and explains the change in the effective tax rate - The decrease in the effective tax rate for Q1 2022 was primarily due to an excess tax deficiency from stock-based compensation, partially offset by an increase in permanent differences[71](index=71&type=chunk) - The company has accrued approximately **$2.9 million** in interest and penalties related to unrecognized tax benefits as of March 31, 2022[72](index=72&type=chunk) - The company is currently under examination by the IRS for tax years 2013-2016, by the Indian Tax Authority for 2017 and 2019, and by California and Texas state tax authorities for various periods[73](index=73&type=chunk) Income Tax Benefit Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | Effective Tax Rate 2022 | Effective Tax Rate 2021 | | :---------------------- | :------------------ | :------------------ | :-------------------- | :---------------------- | :---------------------- | | Income tax benefit | $(156) | $(4,880) | $4,724 | 3.2% | 18.3% | [9. Commitment and Contingencies](index=18&type=section&id=9.%20Commitment%20and%20Contingencies) Discloses expenses, lawsuits, investigations, and insurance coverage related to the Cyber Incident - The company incurred pretax gross expenses related to the Cyber Incident of **$5.7 million in Q1 2022**, down from **$20.4 million** (net $10.2 million after insurance) in Q1 2021[75](index=75&type=chunk)[76](index=76&type=chunk) - Expenses for the Cyber Incident include investigation, remediation, legal, and professional services, with general and administrative expense presented net of insurance proceeds[77](index=77&type=chunk) - The company is subject to multiple lawsuits (consolidated class action, shareholder derivative actions) and investigations by domestic and foreign governmental authorities related to the Cyber Incident[78](index=78&type=chunk)[80](index=80&type=chunk)[81](index=81&type=chunk) - While losses from these proceedings are reasonably possible, the amount cannot be estimated due to the early stage of litigation and unspecified damages; such losses could be **material**[82](index=82&type=chunk) - SolarWinds maintains **$15 million** in cybersecurity insurance (renewed June 2021) and **$50 million** in D&O liability insurance; as of March 31, 2022, **$15 million** in cybersecurity insurance proceeds had been received[84](index=84&type=chunk) - In connection with the N-able spin-off, SolarWinds agreed to indemnify N-able for all liabilities related to the Cyber Incident, excluding certain specified expenses[85](index=85&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Provides management's perspective on financial condition and operating results for Q1 2022 compared to Q1 2021 [Overview](index=20&type=section&id=Overview) Describes SolarWinds' business as a leading provider of IT management software and its core operational strategies - SolarWinds is a leading provider of IT management software, offering solutions to monitor, manage, and optimize various IT infrastructures for organizations worldwide[89](index=89&type=chunk)[90](index=90&type=chunk) - The company operates with a "customer-driven products with an 'inside-first' sales model" and aims to innovate and invest in product development to enhance functionality and integration[89](index=89&type=chunk)[90](index=90&type=chunk) [Spin-Off of N-able Business](index=20&type=section&id=Spin-Off%20of%20N-able%20Business) Details the completion of the N-able business separation and associated costs - The separation of the N-able business was completed on July 19, 2021, and its historical financial results are now reported as discontinued operations[92](index=92&type=chunk) - Spin-off costs were **$0.2 million in Q1 2022** and **$9.9 million in Q1 2021**, with the majority of 2021 costs in discontinued operations; no significant spin-off costs are expected in 2022[93](index=93&type=chunk) [Cyber Incident](index=20&type=section&id=Cyber%20Incident) Discusses the ongoing remediation efforts, financial impact, and insurance coverage related to the Cyber Incident - The company continues extensive measures to investigate, contain, eradicate, and remediate the Cyber Incident, and is implementing enhanced security practices through its "Secure by Design" initiative[95](index=95&type=chunk) - The "Secure By Design" initiatives have increased ongoing expenses by approximately **$20 million annually**, primarily in research and development and general and administrative expenses[99](index=99&type=chunk) - The company expects to continue incurring legal and professional services costs related to ongoing and potential new claims, investigations, and customer support activities due to the Cyber Incident[101](index=101&type=chunk) - SolarWinds maintains **$15 million** in cybersecurity insurance (fully received as of March 31, 2022) and **$50 million** in D&O liability insurance[103](index=103&type=chunk) Cyber Incident Expenses | Metric | 2022 (in thousands) | 2021 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Pretax gross expenses | $5,700 | $20,400 | | Expected insurance proceeds (2021 only) | N/A | $10,200 | | Pretax net expenses (2021 only) | N/A | $10,200 | | Cost of recurring revenue (gross) | $200 | $800 | | Sales and marketing expense (gross) | $100 | $800 | | General and administrative expense (gross) | $5,500 | $18,800 | [Impacts of COVID-19](index=22&type=section&id=Impacts%20of%20COVID-19) Assesses the impact of the COVID-19 pandemic on the company's financial results and future outlook - While COVID-19 contributed to a decline in license revenue, the company does not expect a significant ongoing impact on financial results in future periods based on current conditions[105](index=105&type=chunk) - The longer-term impact remains uncertain due to factors like pandemic duration, virus variants, vaccine efficacy, and economic conditions[105](index=105&type=chunk) [First Quarter Highlights](index=22&type=section&id=First%20Quarter%20Highlights) Presents key performance indicators for the first quarter, including customer counts and annual recurring revenue [Customers](index=22&type=section&id=Customers) Reports the total number of customers and those with significant annual contract values - As of March 31, 2022, SolarWinds had over **300,000 customers** (after N-able separation)[107](index=107&type=chunk) Customers with >$100,000 in Annual Contract Value | Year | Number of Customers | | :--- | :------------------ | | 2022 | 852 | | 2021 | 771 | [Annual Recurring Revenue (ARR)](index=22&type=section&id=Annual%20Recurring%20Revenue%20(ARR)) Details the growth in subscription and total annual recurring revenue - Subscription ARR growth was driven by customers transitioning to subscription pricing and sales of database monitoring and service desk solutions; total ARR increased slightly due to Subscription ARR growth, offset by a decline in maintenance contracts due to lower license sales and Cyber Incident impacts[111](index=111&type=chunk) ARR Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Year-over-Year Growth (%) | | :------------------ | :------------------ | :------------------ | :------------------------ | | Subscription ARR | $141,840 | $108,911 | 30.2% | | Total ARR | $622,860 | $622,470 | 0.1% | [Components of Our Results of Operations](index=23&type=section&id=Components%20of%20Our%20Results%20of%20Operations) Explains the key line items in the company's income statement, including revenue, costs, and expenses [Revenue](index=23&type=section&id=Revenue_Components) Defines the different types of revenue and discusses expected trends - Revenue consists of recurring revenue (subscription and maintenance) and perpetual license revenue[113](index=113&type=chunk) - Subscription revenue is primarily from SaaS offerings and time-based license arrangements, recognized ratably or at a point in time upon delivery[115](index=115&type=chunk) - Maintenance revenue is from services associated with perpetual licenses, recognized ratably over the contract period[115](index=115&type=chunk) - License revenue is from sales of perpetual licenses, recognized at a point in time upon delivery of the electronic license key, including one year of maintenance[115](index=115&type=chunk) - The company expects a continued shift from license to recurring revenue as customers transition to subscription offerings, and license sales and maintenance renewal rates may fluctuate due to this shift and the Cyber Incident[114](index=114&type=chunk) [Cost of Revenue](index=23&type=section&id=Cost%20of%20Revenue_Components) Describes the components of cost of revenue, including support personnel and amortization of acquired technologies - Cost of recurring revenue includes technical support personnel, public cloud infrastructure, hosting fees, and allocated overhead; public cloud and hosting fees are expected to increase with subscription expansion[116](index=116&type=chunk) - Amortization of acquired technologies relates to capitalized costs from the Take Private transaction and other acquisitions[116](index=116&type=chunk) [Operating Expenses](index=23&type=section&id=Operating%20Expenses_Components) Details the main categories of operating expenses and expected future trends - Operating expenses include sales & marketing, R&D, general & administrative, and amortization of acquired intangibles; personnel costs are the most significant component[115](index=115&type=chunk)[117](index=117&type=chunk) - Total employees as of March 31, 2022, were **2,199**, up from **2,074** (excluding N-able) as of March 31, 2021[117](index=117&type=chunk) - Operating expenses are expected to increase in absolute dollars due to long-term investments, increased selling efforts toward enterprise customers, and potential future acquisitions[118](index=118&type=chunk) - The N-able spin-off resulted in dis-synergies and increased overhead costs in 2021; stock-based compensation and travel costs are also expected to increase[118](index=118&type=chunk) [Other Income (Expense)](index=24&type=section&id=Other%20Income%20(Expense)_Components) Explains the components of other income and expense, primarily interest and foreign currency impacts - Primarily consists of interest expense and foreign currency exchange gains/losses[119](index=119&type=chunk) - Interest expense may increase due to anticipated interest rate increases on variable-rate debt[119](index=119&type=chunk) [Foreign Currency](index=24&type=section&id=Foreign%20Currency_Components) Discusses the company's exposure to foreign currency exchange rate movements - As a global company, SolarWinds is exposed to adverse movements in foreign currency exchange rates, impacting assets, liabilities, revenue, operating expenses, and cash flows[120](index=120&type=chunk) [Income Tax Expense (Benefit)](index=24&type=section&id=Income%20Tax%20Expense%20(Benefit)_Components) Describes the nature of income tax expense and factors affecting the effective tax rate - Income tax expense (benefit) is from domestic and foreign corporate income taxes[121](index=121&type=chunk) - The effective tax rate may decline over time as international income grows as a percentage of total income, but is subject to changes in tax laws, regulations, and income allocation[121](index=121&type=chunk) [Comparison of the Three Months Ended March 31, 2022 and 2021](index=25&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20March%2031%2C%202022%20and%202021) Provides a detailed comparative analysis of revenue, cost of revenue, and operating expenses for Q1 2022 versus Q1 2021 [Revenue](index=25&type=section&id=Revenue_Comparison) Analyzes the year-over-year changes in subscription, maintenance, and license revenue streams - Total revenue increased by **1.7% YoY**; North America accounted for approximately **69%** of total revenue in both periods[122](index=122&type=chunk) - Subscription revenue increased by **36.8%** due to customer transitions to subscription models and sales of database monitoring solutions[124](index=124&type=chunk) - Maintenance revenue decreased by **4.3%** due to decreased licensed product sales, customer transitions to subscriptions, and a decline in the maintenance renewal rate, primarily due to the Cyber Incident[126](index=126&type=chunk) - License revenue decreased by **9.0%** due to increased subscription sales of products historically sold as perpetual licenses[129](index=129&type=chunk) Revenue by Type | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------- | :------------------ | :------------------ | :-------------------- | :------------- | | Subscription | $38,747 | $28,317 | $10,430 | 36.8% | | Maintenance | $115,495 | $120,665 | $(5,170) | -4.3% | | Total recurring revenue | $154,242 | $148,982 | $5,260 | 3.5% | | License | $22,626 | $24,874 | $(2,248) | -9.0% | | Total revenue | $176,868 | $173,856 | $3,012 | 1.7% | Net Retention Rate | Year | Net Retention Rate | | :--- | :----------------- | | 2022 | 96% | | 2021 | 96% | Maintenance Renewal Rate | Year | Maintenance Renewal Rate | | :--- | :----------------------- | | 2022 | 89% | | 2021 | 92% | [Cost of Revenue](index=26&type=section&id=Cost%20of%20Revenue_Comparison) Explains the decrease in total cost of revenue, driven by lower amortization of acquired technologies - Total cost of revenue decreased primarily due to a **$23.2 million decrease** in amortization of acquired technologies, as certain intangible assets from the Take Private transaction were fully amortized[130](index=130&type=chunk) - Cost of recurring revenue increased due to higher public cloud infrastructure and hosting fees (**$2.5 million**) and personnel costs (**$0.3 million**), partially offset by a decrease in Cyber Incident-related costs (**$0.7 million**)[130](index=130&type=chunk) Cost of Revenue Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------------- | :------------------ | :------------------ | :-------------------- | | Cost of recurring revenue | $17,831 | $15,654 | $2,177 | | Amortization of acquired technologies | $17,227 | $40,417 | $(23,190) | | Total cost of revenue | $35,058 | $56,071 | $(21,013) | [Operating Expenses](index=26&type=section&id=Operating%20Expenses_Comparison) Breaks down the changes in sales, R&D, and administrative expenses between Q1 2022 and Q1 2021 - Sales and marketing expenses increased by **$3.4 million (5.9%)** due to higher personnel costs, marketing programs, and travel, partially offset by lower public relations costs related to the Cyber Incident[131](index=131&type=chunk) - Research and development expenses decreased by **$2.9 million (11.1%)** due to lower personnel costs and increased capitalized employee costs for the Observability platform, partially offset by increased contract services[132](index=132&type=chunk) - General and administrative expenses increased by **$1.8 million (5.8%)** due to higher personnel costs, increased insurance, and restructuring costs, partially offset by a decrease in Cyber Incident-related costs[133](index=133&type=chunk) - Amortization of acquired intangibles decreased by **$0.8 million (5.7%)** as certain intangibles were fully amortized and due to foreign currency exchange rate changes[134](index=134&type=chunk) Operating Expenses Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------------- | :------------------ | :------------------ | :-------------------- | | Sales and marketing | $61,044 | $57,666 | $3,378 | | Research and development | $23,422 | $26,358 | $(2,936) | | General and administrative | $32,664 | $30,865 | $1,799 | | Amortization of acquired intangibles | $13,239 | $14,038 | $(799) | | Total operating expenses | $130,369 | $128,927 | $1,442 | [Interest Expense, Net](index=27&type=section&id=Interest%20Expense%2C%20Net_Comparison) Reports a slight decrease in net interest expense due to debt reduction - Interest expense, net, decreased slightly by **$0.1 million (0.5%)** due to a reduction in outstanding debt balance from quarterly principal repayments; the weighted-average effective interest rate was **2.9%** for both periods[135](index=135&type=chunk) Interest Expense, Net Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------- | :------------------ | :------------------ | :-------------------- | | Interest expense, net | $(16,087) | $(16,174) | $87 | [Other Income (Expense), Net](index=27&type=section&id=Other%20Income%20(Expense)%2C%20Net_Comparison) Attributes the change in other income to foreign currency exchange rate impacts - Other income (expense), net, decreased by **$0.8 million**, primarily due to the impact of changes in foreign currency exchange rates[136](index=136&type=chunk) Other Income (Expense), Net Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------------- | :------------------ | :------------------ | :-------------------- | | Other income (expense), net | $(169) | $656 | $(825) | [Income Tax Expense (Benefit)](index=27&type=section&id=Income%20Tax%20Expense%20(Benefit)_Comparison) Explains the significant decrease in the effective tax rate compared to the prior year - The effective tax rate decreased to **3.2% from 18.3%**, primarily due to an excess tax deficiency from stock-based compensation, partially offset by increased permanent differences[137](index=137&type=chunk) Income Tax Benefit Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Effective Tax Rate 2022 | Effective Tax Rate 2021 | | :---------------------- | :------------------ | :------------------ | :---------------------- | :---------------------- | | Income tax benefit | $(156) | $(4,880) | 3.2% | 18.3% | [Discontinued Operations](index=27&type=section&id=Discontinued%20Operations_MD&A) Confirms that the historical financial results of the N-able business are reported as discontinued operations - N-able's historical financial results through the July 19, 2021, Separation date are reflected as discontinued operations in the condensed consolidated financial statements[139](index=139&type=chunk) [Non-GAAP Financial Measures from Continuing Operations](index=28&type=section&id=Non-GAAP%20Financial%20Measures%20from%20Continuing%20Operations) Presents non-GAAP financial measures to provide additional insight into the company's operating performance [Non-GAAP Revenue from Continuing Operations](index=28&type=section&id=Non-GAAP%20Revenue%20from%20Continuing%20Operations) Reconciles GAAP revenue to non-GAAP revenue, noting the discontinuation of purchase accounting adjustments - Beginning in Q1 2022, the company no longer adjusts GAAP revenue for the impact of purchase accounting[142](index=142&type=chunk) Non-GAAP Revenue Reconciliation | Metric | 2022 (in thousands) | 2021 (in thousands) | | :-------------------- | :------------------ | :------------------ | | Total GAAP revenue | $176,868 | $173,856 | | Impact of purchase accounting | $0 | $79 | | Total non-GAAP revenue | $176,868 | $173,935 | [Non-GAAP Operating Income and Non-GAAP Operating Margin from Continuing Operations](index=28&type=section&id=Non-GAAP%20Operating%20Income%20and%20Non-GAAP%20Operating%20Margin%20from%20Continuing%20Operations) Reconciles GAAP operating income to non-GAAP operating income by excluding certain non-cash and non-recurring items - Non-GAAP operating income excludes purchase accounting impact, amortization of acquired intangibles, stock-based compensation, acquisition and other costs, restructuring costs, and Cyber Incident costs[144](index=144&type=chunk) Non-GAAP Operating Income Reconciliation | Metric | 2022 (in thousands) | 2021 (in thousands) | | :------------------------------------------ | :------------------ | :------------------ | | GAAP operating income (loss) | $11,441 | $(11,142) | | Stock-based compensation expense and related employer-paid payroll taxes | $15,937 | $14,528 | | Amortization of acquired technologies | $17,227 | $40,417 | | Amortization of acquired intangibles | $13,239 | $14,038 | | Cyber Incident costs, net | $5,716 | $10,163 | | Non-GAAP operating income | $65,151 | $69,744 | | GAAP operating margin | 6.5% | (6.4)% | | Non-GAAP operating margin | 36.8% | 40.1% | [Adjusted EBITDA and Adjusted EBITDA Margin from Continuing Operations](index=30&type=section&id=Adjusted%20EBITDA%20and%20Adjusted%20EBITDA%20Margin%20from%20Continuing%20Operations) Reconciles net loss to Adjusted EBITDA, a key measure of operating performance - Adjusted EBITDA is defined as net income or loss, excluding various non-cash and non-recurring items, and is used to assess operating performance[146](index=146&type=chunk) Adjusted EBITDA Reconciliation | Metric | 2022 (in thousands) | 2021 (in thousands) | | :------------------------------------------ | :------------------ | :------------------ | | Net loss from continuing operations | $(4,659) | $(21,780) | | Amortization and depreciation | $33,928 | $58,355 | | Interest expense, net | $16,087 | $16,174 | | Stock-based compensation expense and related employer-paid payroll taxes | $15,937 | $14,528 | | Cyber Incident costs, net | $5,716 | $10,163 | | Adjusted EBITDA | $68,790 | $72,950 | | Adjusted EBITDA margin | 38.9% | 41.9% | [Liquidity and Capital Resources](index=30&type=section&id=Liquidity%20and%20Capital%20Resources) Discusses the company's cash position, debt, cash flows, and ability to meet future financial obligations [Cash and cash equivalents](index=30&type=section&id=Cash%20and%20cash%20equivalents_Liquidity) Reports the company's cash balance and its distribution between domestic and international subsidiaries - International subsidiaries held approximately **$34.9 million** of cash and cash equivalents as of March 31, 2022, with **59.0%** in Euros[149](index=149&type=chunk) - The company believes existing cash, operating cash flows, and borrowing capacity will be sufficient to fund operations, debt repayments, and capital expenditures for at least the next 12 months, despite Cyber Incident uncertainties[151](index=151&type=chunk) Cash and Cash Equivalents | Date | Amount (in thousands) | | :--------- | :-------------------- | | March 31, 2022 | $751,218 | | December 31, 2021 | $732,116 | [Indebtedness](index=31&type=section&id=Indebtedness_Liquidity) Summarizes the company's total outstanding debt and available credit facility - As of March 31, 2022, the company had up to **$117.5 million** of available borrowings under its revolving credit facility[153](index=153&type=chunk) Total Debt | Date | Amount (in billions) | | :--------- | :------------------- | | March 31, 2022 | $1.9 | | December 31, 2021 | $1.91 | [First Lien Credit Agreement](index=31&type=section&id=First%20Lien%20Credit%20Agreement_Liquidity) Details the key terms of the company's primary credit facility, including loan amounts and repayment requirements - The First Lien Credit Agreement includes a **$117.5 million** senior secured revolving credit facility and a **$1,990.0 million** term loan facility[154](index=154&type=chunk) - The agreement allows for additional commitments for new incremental term loans and revolving loans, subject to certain baskets and leverage ratios[155](index=155&type=chunk) - The First Lien Term Loan requires equal quarterly repayments of **0.25%** of the original principal amount[156](index=156&type=chunk) [Summary of Cash Flows](index=31&type=section&id=Summary%20of%20Cash%20Flows) Provides a high-level overview of cash flows from operating, investing, and financing activities | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------------------------------------- | :------------------ | :------------------ | :-------------------- | | Net cash provided by operating activities from continuing operations | $40,258 | $15,965 | $24,293 | | Net cash used in investing activities from continuing operations | $(10,800) | $(3,868) | $(6,932) | | Net cash used in financing activities from continuing operations | $(9,629) | $(10,423) | $794 | | Net increase in cash and cash equivalents | $19,102 | $3,854 | $15,248 | [Operating Activities](index=31&type=section&id=Operating%20Activities_Liquidity) Explains the increase in cash from operating activities, driven by changes in operating assets and liabilities - Cash provided by operating activities increased primarily due to decreased cash outflows from changes in operating assets and liabilities (**$0.9 million outflow in Q1 2022** vs **$37.9 million outflow in Q1 2021**)[159](index=159&type=chunk) - Q1 2022 operating cash flow includes **$5.0 million** in insurance proceeds for Cyber Incident costs[159](index=159&type=chunk) - Cash paid for taxes was **$6.3 million in Q1 2022**, down from **$14.4 million in Q1 2021**[160](index=160&type=chunk) [Investing Activities](index=32&type=section&id=Investing%20Activities_Liquidity) Details the increase in cash used for investing, primarily due to an acquisition and capitalized R&D costs - Net cash used in investing activities increased due to the acquisition of Monalytic, Inc and higher capitalized research and development costs for subscription-based offerings[162](index=162&type=chunk) [Financing Activities](index=32&type=section&id=Financing%20Activities_Liquidity) Describes the use of cash in financing activities, including debt repayments and stock repurchases - Net cash used in financing activities decreased slightly due to reduced repurchases of common stock and incentive restricted stock, partially offset by lower proceeds from employee stock purchase plans[164](index=164&type=chunk) - The company withheld and retired **$6.4 million (Q1 2022)** and **$8.4 million (Q1 2021)** in common stock to satisfy tax requirements related to restricted stock unit settlements[165](index=165&type=chunk) - Quarterly principal payments of **$5.0 million** were made under the First Lien Credit Agreement in both Q1 2022 and Q1 2021[166](index=166&type=chunk) [Contractual Obligations and Commitments](index=32&type=section&id=Contractual%20Obligations%20and%20Commitments) Confirms no material changes to contractual obligations and off-balance sheet arrangements - No material changes to contractual obligations and commitments were reported since December 31, 2021[167](index=167&type=chunk) - The company had no relationships with unconsolidated organizations or financial partnerships for off-balance sheet arrangements during Q1 2022[168](index=168&type=chunk) [Critical Accounting Policies and Estimates](index=32&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Reaffirms the key accounting estimates and policies from the 2021 Annual Report - Key accounting estimates include valuation of goodwill, intangibles, long-lived assets, contingent consideration, revenue recognition, stock-based compensation, income taxes, and loss contingencies[170](index=170&type=chunk) - No material changes to critical accounting policies and estimates have occurred since the Annual Report on Form 10-K for 2021[171](index=171&type=chunk) [Goodwill](index=33&type=section&id=Goodwill_Liquidity) Discusses the process and results of goodwill impairment testing - Goodwill is tested for impairment annually on October 1st or when circumstances indicate[172](index=172&type=chunk) - As of December 31, 2021, the fair value of the reporting unit exceeded its carrying value by **7.2%**, with no impairment recognized[173](index=173&type=chunk) - Despite a further decline in market capitalization as of March 31, 2022, no impairment indicators were found, but future impairment charges are possible if cash flow assumptions are not met or stock price declines persist[174](index=174&type=chunk)[175](index=175&type=chunk) [Recent Accounting Pronouncements](index=33&type=section&id=Recent%20Accounting%20Pronouncements) Refers to the financial statement notes for a description of recent accounting pronouncements - Refer to Note 2 Summary of Significant Accounting Policies for a full description of recent accounting pronouncements[176](index=176&type=chunk) [Item 3. Quantitative and Qualitative Disclosures of Market Risk](index=33&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20of%20Market%20Risk) Outlines the company's exposure to interest rate and foreign currency exchange risks and its management strategies [Interest Rate Risk](index=33&type=section&id=Interest%20Rate%20Risk) Details the potential impact of interest rate fluctuations on the company's variable-rate debt - Cash and cash equivalents were **$751.2 million** (March 31, 2022) and **$732.1 million** (December 31, 2021), primarily in highly liquid investments with maturities of three months or less, posing no material market risk[177](index=177&type=chunk)[178](index=178&type=chunk) - Total indebtedness was **$1.90 billion** (March 31, 2022) and **$1.91 billion** (December 31, 2021), with variable interest rates[179](index=179&type=chunk) - A hypothetical **100 basis point increase** in interest rates would result in an approximate **$19.1 million** annual increase in interest expense[180](index=180&type=chunk) [Foreign Currency Exchange Risk](index=34&type=section&id=Foreign%20Currency%20Exchange%20Risk) Explains the company's exposure to currency fluctuations from its international business operations - The company is exposed to foreign currency exchange rate fluctuations, primarily involving the Euro, British Pound Sterling, and Australian Dollar against the USD, due to international business operations[182](index=182&type=chunk) - Fluctuations impact assets, liabilities, revenue, operating expenses, and cash flows upon translation into USD, with international revenue and expenses primarily flowing through European subsidiaries with Euro functional currency[183](index=183&type=chunk) [Foreign Currency Transaction Risk](index=34&type=section&id=Foreign%20Currency%20Transaction%20Risk) Describes risks arising from transactions denominated in foreign currencies and the use of hedging instruments - Foreign currency exposures arise from multi-currency maintenance contracts and subscriptions, accounts receivable, and intercompany transactions[185](index=185&type=chunk) - The company uses purchased foreign currency forward contracts to minimize foreign exchange exposure on certain balance sheet positions, but had no outstanding contracts as of March 31, 2022, and December 31, 2021[186](index=186&type=chunk) [Foreign Currency Translation Risk](index=34&type=section&id=Foreign%20Currency%20Translation%20Risk) Discusses the impact of translating foreign subsidiary financial statements into U.S. dollars - Fluctuations in foreign currencies impact the USD reported amounts of assets, liabilities, revenue, operating expenses, and cash flows for foreign subsidiaries[188](index=188&type=chunk) - A strengthening USD reduces reported amounts for international operations, while a weakening USD increases them, leading to remeasurement gains/losses in income or translation gains/losses in accumulated other comprehensive income (loss)[189](index=189&type=chunk) [Item 4. Controls and Procedures](index=35&type=section&id=Item%204.%20Controls%20and%20Procedures) Confirms the effectiveness of disclosure controls and notes no material changes in internal financial reporting controls [Evaluation of Disclosure Controls and Procedures](index=35&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) States management's conclusion on the effectiveness of the company's disclosure controls and procedures - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2022[191](index=191&type=chunk) [Changes in Internal Control over Financial Reporting](index=35&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) Reports that no material changes were made to internal controls over financial reporting during the quarter - No changes in internal control over financial reporting occurred during Q1 2022 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[192](index=192&type=chunk) PART II - OTHER INFORMATION [Item 1. Legal Proceedings](index=36&type=section&id=Item%201.%20Legal%20Proceedings) Addresses ongoing litigation and investigations related to the Cyber Incident and other ordinary course legal matters - For details on lawsuits and government investigations related to the Cyber Incident, refer to Item 2 and Note 9 of the financial statements[195](index=195&type=chunk) - While other ordinary course litigation exists, it is not expected to have a material adverse effect on the company's financial condition, results of operations, or cash flows[196](index=196&type=chunk) [Item 1A. Risk Factors](index=36&type=section&id=Item%201A.%20Risk%20Factors) Confirms no material changes to the risk factors disclosed in the 2021 Annual Report on Form 10-K - No material changes to risk factors have occurred since those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021[197](index=197&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=36&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Reports on the repurchase of unvested restricted stock from employees during the quarter - All repurchases relate to unvested restricted stock from employees, exercised by the company's right of repurchase, and are not part of a publicly announced plan or program[198](index=198&type=chunk) Stock Repurchases | Period | Number of Shares Purchased | 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) | | :--------------- | :------------------------- | :--------------------------- | :----------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------- | | March 1-31, 2022 | 3,600 | $3.39 | — | — | [Item 6. Exhibits](index=37&type=section&id=Item%206.%20Exhibits) Lists all exhibits filed with the Form 10-Q, including corporate governance documents and required certifications - The exhibit index includes the Third Amended and Restated Certificate of Incorporation, Certificate of Amendment, Amended and Restated Bylaws, CEO and CFO certifications (31.1, 31.2, 32.1), and Interactive Data Files (101, 104)[201](index=201&type=chunk) [Signatures](index=38&type=section&id=Signatures) Confirms the report's authorization by the Chief Financial Officer on May 6, 2022 - The report was signed by J Barton Kalsu, Chief Financial Officer, on May 6, 2022[205](index=205&type=chunk) [Certifications](index=37&type=section&id=Certifications) Notes the inclusion of required CEO and CFO certifications attesting to the report's accuracy - Certifications of the Chief Executive Officer and Chief Financial Officer are filed as Exhibit 31.1, 31.2, and 32.1, with Exhibit 32.1 being furnished, not filed, and not incorporated by reference into other filings[201](index=201&type=chunk)

Financial Data and Key Metrics Changes - Total revenue for Q1 2022 was $177 million, exceeding the high end of the guidance range of $173 million to $176 million, representing a 2% year-over-year growth [17][27] - Adjusted EBITDA was $69 million, with an adjusted EBITDA margin of 39%, also exceeding expectations for the quarter [17][35] - Subscription revenue grew by 37% year-over-year, driven by the conversion of a large customer to a term subscription [19][29] - Subscription ARR as of March 31, 2022, was $142 million, reflecting a 30% year-over-year increase [30] Business Line Data and Key Metrics Changes - License revenue for Q1 2022 was $22.6 million, a decline of approximately 9% compared to Q1 2021 [33] - Maintenance revenue was $115.5 million, down 4% year-over-year [30] - The company reported an in-quarter renewal rate of 91%, returning to historical norms in the low to mid-90s [18][32] Market Data and Key Metrics Changes - The company anticipates a market opportunity of approximately $60 billion by 2025, aiming for at least $1 billion in ARR by that time [13] - The company noted currency headwinds, particularly with the euro being 9% lower than when initial guidance was provided [37] Company Strategy and Development Direction - The company is focusing on a subscription-first mentality and transitioning to platform-based solutions, highlighted by the launch of a hybrid observability solution [12][26] - The strategy includes consolidating tools for customers to enhance visibility and integration, leading to larger deal sizes [20] - The company aims to achieve compounded annual subscription ARR growth of over 30% through 2025 while maintaining EBITDA margins in the mid-40s [13] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenging macro environment, primarily due to currency fluctuations, but noted limited direct impacts from geopolitical issues [58] - The company expects total revenue for Q2 2022 to be in the range of $174 million to $177 million, indicating a year-over-year decline of 2% to flat [38] - Full-year guidance remains unchanged, with total revenue expected between $730 million to $750 million, reflecting a year-over-year growth of 2% to 4% [39][43] Other Important Information - The company completed the spin-off of the N-able business on July 19, 2021, and the results presented reflect SolarWinds as a standalone entity [7] - The company has not historically hedged its interest rate exposure, with all debt subject to variable interest rates [102] Q&A Session Summary Question: Insights on the large customer conversion to subscription - Management indicated that the conversion was driven by the value proposition of hybrid observability and the consolidation of vendor products [53][54] Question: Impact of macroeconomic conditions - Management highlighted that FX is the primary concern, with limited direct impacts from geopolitical issues [58] Question: Health of SME spending globally - Management believes SME spending will remain robust, driven by demand for efficiency and security solutions [61][62] Question: Interest expense exposure to variable rates - The company confirmed that all of its $1.9 billion debt is subject to variable interest rates, which will impact cash flow as rates rise [64] Question: Metrics for observability platform success - Management emphasized the importance of subscription revenue growth and subscription ARR as key metrics to monitor [65][66] Question: Feedback on node-based pricing model - Positive feedback was received regarding the flexibility of the node-based licensing model, which is expected to enhance sales velocity [72][73] Question: Recent acquisition of Monalytic - The acquisition was aimed at strengthening the company's position in the federal and public sector space [75] Question: Sales motion and hiring focus - The company is focusing on inside sales while selectively hiring for enterprise sales roles [80][81] Question: Guidance clarity on FX impact - Management provided insights on constant currency growth rates and the expected impact of currency fluctuations on revenue [85] Question: ARR expansion from maintenance to subscription conversion - Conversions are expected to yield higher ARR, with early indications showing a conversion multiple greater than one-to-one [90][92]