UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q (Mark One) ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2021 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 jurisdic ...

SolarWinds Corp (NYSE:SWI) Q1 2021 Earnings Conference Call April 29, 2021 8:30 AM ET Company Participants Howard MA - Senior Director, IR Sudhakar Ramakrishna - President, CEO & Director John Pagliuca - EVP & President, MSP Barton Kalsu - EVP, CFO & Treasurer Conference Call Participants Matt Hedberg - RBC Capital Markets Sterling Auty - JPMorgan Chase & Co. Robert Oliver - Robert W. Baird & Co. Kingsley Crane - Berenberg Erik Suppiger - JMP Securities Melissa Dunn - Morgan Stanley Terry Tillman - Truist S ...

Q1'21 Results April 29, 2021 © 2021 SolarWinds Worldwide, LLC. All rights reserved. General Disclaimer 2 Forward-Looking Statements 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, the impact of the cyberattack that occurred in December 2020 (the "Cyber Incident"), the potential spin-off of our N-able busi ...

[Introductory Information](index=4&type=section&id=Introductory%20Information) This section provides an introductory note on the Cyber Incident and a disclaimer regarding forward-looking statements [Introductory Note: Cyber Incident](index=4&type=section&id=INTRODUCTORY%20NOTE) SolarWinds disclosed a cyberattack on its Orion platform in December 2020, involving malicious code and affecting a limited number of customers - SolarWinds announced a cyberattack on its Orion Software Platform and internal systems on December 14, 2020, involving malicious code (Sunburst) injected into builds released between March and June 2020[11](index=11&type=chunk)[12](index=12&type=chunk) - Remediations have been released, and proprietary code was shared to validate a "kill-switch" for Sunburst[13](index=13&type=chunk) - The company believes fewer than **18,000 customers** installed an affected version of the Orion Software Platform, and substantially fewer were exploited by threat actors[14](index=14&type=chunk) - The cyberattack is widely reported as a sophisticated nation-state level operation, and SolarWinds is implementing a "Secure by Design" initiative to enhance security measures[15](index=15&type=chunk)[16](index=16&type=chunk) [Special Note Regarding Forward-Looking Statements](index=5&type=section&id=SPECIAL%20NOTE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This section disclaims forward-looking statements, noting actual results may differ due to risks, and defines key terms - The report contains forward-looking statements subject to known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially[18](index=18&type=chunk)[19](index=19&type=chunk) - Readers are cautioned not to place undue reliance on these statements, which represent management's beliefs and assumptions only as of the report date[19](index=19&type=chunk) - Key forward-looking statements include expectations regarding financial performance, the impact of the Cyber Incident, product development, acquisitions, hiring, international operations, capital expenditures, COVID-19 impact, and the potential spin-off of the MSP business[20](index=20&type=chunk) [PART I](index=6&type=section&id=PART%20I) This part details the company's business operations, associated risk factors, property information, legal proceedings, and other statutory disclosures [Item 1. Business](index=6&type=section&id=Item%201.%20Business) SolarWinds provides IT infrastructure management software using a high-velocity sales model, focusing on innovation, acquisitions, and international growth - SolarWinds is a leading provider of IT infrastructure management software, enabling organizations to monitor and manage IT environments across on-premises, cloud, and hybrid models[22](index=22&type=chunk) - The company employs a "SolarWinds Model" characterized by powerful, scalable, affordable, easy-to-use products combined with a high-velocity, low-touch sales approach[22](index=22&type=chunk)[24](index=24&type=chunk) - Revenue is derived from subscription (MSP, application performance management, IT service management) and license/maintenance sales, with a strategic focus on growing recurring revenue[29](index=29&type=chunk) [Overview](index=6&type=section&id=Overview) SolarWinds offers IT management software via a high-velocity sales model, focusing on user needs and growing recurring revenue through innovation - SolarWinds offers a comprehensive portfolio of Core IT Management products for ITOps, DevOps, and IT security professionals, and cloud-based solutions for Managed Service Providers (MSPs) serving Small and Medium-sized Enterprises (SMEs)[23](index=23&type=chunk) - The company's marketing and sales strategy is a digital, direct inside sales approach, leveraging online communities like THWACK and MSP Institute to engage with technology professionals[26](index=26&type=chunk)[27](index=27&type=chunk) - Revenue is primarily from subscription (MSP, application performance management, ITSM) and license/maintenance, with subscription and maintenance revenue significantly increasing over time[29](index=29&type=chunk) [Cyber Incident](index=7&type=section&id=Cyber%20Incident_Item1) This section briefly notes the December 2020 cyberattack on the Orion platform, with further details in other 10-K sections - The company announced a cyberattack on its Orion Software Platform and internal systems on December 14, 2020[31](index=31&type=chunk) - Further details on the Cyber Incident, including risks, financial condition, results of operations, and legal proceedings, are provided in Item 1A, Item 7, and Note 16 of the consolidated financial statements[31](index=31&type=chunk) [Potential Spin-Off of MSP Business](index=7&type=section&id=Potential%20Spin-Off%20of%20MSP%20Business_Item1) SolarWinds is exploring a tax-free spin-off of its MSP business into a separate public company, targeted for Q2 2021 - SolarWinds is exploring a potential spin-off of its MSP business into a newly created and separately traded public company, with a Form 10 registration statement confidentially submitted to the SEC[32](index=32&type=chunk) - The spin-off aims to allow each company (standalone MSP and Core IT Management) to pursue distinct operating priorities, strategies, and capital allocation policies[32](index=32&type=chunk) - If completed, the transaction is intended to be a tax-free, pro-rata distribution to all SolarWinds stockholders, targeted for the second quarter of 2021[32](index=32&type=chunk) [The SolarWinds Model](index=7&type=section&id=The%20SolarWinds%20Model) The SolarWinds Model emphasizes user-centric, affordable products, efficient digital marketing, inside sales, and strong customer relationships - The model focuses on understanding technology professionals' daily challenges through engagement via online communities like THWACK and MSP Institute[33](index=33&type=chunk) - Products are designed to be easy to access, try, buy, deploy, and use, built on common platforms for modular expansion, serving businesses from small to large enterprises[34](index=34&type=chunk)[35](index=35&type=chunk) - Sales are conducted through a "selling from the inside" approach, a prescriptive, metrics-based process that efficiently handles transactions without an outside sales force or professional services[38](index=38&type=chunk)[39](index=39&type=chunk) [Growth Strategies](index=8&type=section&id=Growth%20Strategies) Growth strategies include new customer acquisition, increased product penetration, international expansion, continuous innovation, new market entry, and strategic acquisitions - Key growth elements include winning new customers, increasing penetration within the existing customer base by selling additional products and upgrades, and expanding internationally[41](index=41&type=chunk)[42](index=42&type=chunk)[43](index=43&type=chunk) - The company plans to continue innovating by bringing new products and tools to market, enhancing existing products, and improving overall product integration[44](index=44&type=chunk) - Strategic expansion includes entering new markets where the SolarWinds Model provides competitive advantages and pursuing targeted acquisitions that complement the product portfolio or provide access to new markets[45](index=45&type=chunk)[46](index=46&type=chunk) [Our Customers and Market](index=9&type=section&id=Our%20Customers%20and%20Market) SolarWinds serves over 320,000 customers in a complex IT market, capitalizing on demand for hybrid IT management solutions Customer Base as of December 31, 2020 | Metric | Count | | :-------------------------------- | :------ | | Total Customers | >320,000 | | MSP Customers | >25,000 | | SMEs Served by MSPs | >500,000 | - The IT market faces growing complexity due to mixed on-premises, public, private, and hybrid IT environments, requiring comprehensive performance monitoring and management[50](index=50&type=chunk)[51](index=51&type=chunk) - Technology professionals are increasingly influential in software purchasing decisions, preferring to trial products and select solutions tailored to specific challenges, highlighting limitations of expensive, complex, and inflexible alternative solutions[52](index=52&type=chunk)[55](index=55&type=chunk)[56](index=56&type=chunk) [Product Portfolio and Technology Platforms](index=10&type=section&id=Product%20Portfolio%20and%20Technology%20Platforms) SolarWinds provides a broad, integrated product portfolio for IT infrastructure management, including Core IT and MSP solutions - The product portfolio covers network, systems, desktop, application, storage, database, website infrastructures, and IT service desks, with a focus on innovation and integration[57](index=57&type=chunk)[58](index=58&type=chunk) - Core IT Management products provide hybrid IT performance management for ITOps, DevOps, and IT Security professionals, offering deep visibility across the IT stack[59](index=59&type=chunk) - MSP products, rebranded as "N-able" in Q1 2021, offer integrated solutions for remote monitoring and management, security and data protection, and business management for SME end customers[65](index=65&type=chunk)[66](index=66&type=chunk) [Marketing and Sales](index=12&type=section&id=Marketing%20and%20Sales) SolarWinds uses a low-touch, high-velocity digital marketing and inside sales strategy, supported by online communities and channel partners - The company's marketing and sales strategy is a low-touch, high-velocity digital approach, targeting network, systems, DevOps, and MSP professionals[69](index=69&type=chunk)[70](index=70&type=chunk) - Marketing efforts focus on driving website traffic and high-quality leads through digital tools and online communities (THWACK, MSP Institute) that educate and connect with technology professionals[71](index=71&type=chunk)[72](index=72&type=chunk)[73](index=73&type=chunk) - The sales organization operates "from the inside," using a prescriptive, metrics-based approach for new sales and maintenance renewals, and leverages channel partners for broader market reach, including government sales[74](index=74&type=chunk)[75](index=75&type=chunk)[76](index=76&type=chunk)[78](index=78&type=chunk) [Research and Development](index=13&type=section&id=Research%20and%20Development) R&D focuses on new product development, integration, and security via a "Secure by Design" framework and global scrum teams - The R&D organization focuses on design, development, testing, and deployment of new products and improvements, ensuring product integration and complementarity[79](index=79&type=chunk) - A new "Secure by Design" framework is being implemented to enhance security across internal environments, software development processes, and product deployment[79](index=79&type=chunk) - The company engages its user community in the development process and employs a cost-efficient global development model with small scrum teams for rapid and high-quality software releases[80](index=80&type=chunk)[81](index=81&type=chunk)[82](index=82&type=chunk) [Competition](index=13&type=section&id=Competition) SolarWinds faces intense competition from large vendors and specialized firms, with key factors including product capabilities and customer success - The company operates in a highly competitive industry characterized by constant change and innovation, driven by evolving customer requirements[83](index=83&type=chunk) - Principal competitive factors include brand awareness, product capabilities (scalability, performance, security, reliability), ease of use, total cost of ownership, flexible deployment models, sales and marketing efforts, and customer success[83](index=83&type=chunk) - Competitors include large network management and IT vendors (e.g., Cisco Systems, MicroFocus, IBM, BMC Software) and smaller companies in cloud/application monitoring and MSP IT tools markets[83](index=83&type=chunk) [Intellectual Property](index=14&type=section&id=Intellectual%20Property) SolarWinds protects IP via patents, copyrights, and trade secrets, but enforcement is challenging and costly - SolarWinds relies on patent, copyright, trademark, trade dress, trade secret laws, confidentiality procedures, and contractual restrictions to protect its proprietary rights[85](index=85&type=chunk) Issued Patents as of December 31, 2020 | Type | Count | | :---------------- | :---- | | Issued U.S. Patents | 38 | | Issued Foreign Patents | 194 | | Pending Applications | 66 | - Protection is limited, as patents may be challenged or circumvented, and enforcement can be difficult and costly, especially in countries with less protective intellectual property laws[85](index=85&type=chunk)[86](index=86&type=chunk)[87](index=87&type=chunk) [Human Capital Management](index=14&type=section&id=Human%20Capital%20Management) SolarWinds had **3,340** global employees as of December 31, 2020, prioritizing a people-centric culture and talent development Employee Count as of December 31, 2020 | Location | Count | | :---------------- | :---- | | Total Employees | 3,340 | | United States | 1,191 | | Outside United States | 2,149 | - The company emphasizes a people-centric approach, valuing its talented and diverse global workforce across various functions[88](index=88&type=chunk)[90](index=90&type=chunk) - SolarWinds invests in attracting top talent, training, development initiatives, and retaining high-potential employees, recognizing their strong values and passion as key to achieving company goals[91](index=91&type=chunk) [Additional Information](index=14&type=section&id=Additional%20Information) SEC filings, including 10-K, 10-Q, and 8-K reports, are available on the company's investor relations website and the SEC's website - The company's website (www.solarwinds.com) provides access to SEC filings, including 10-K, 10-Q, and 8-K reports, free of charge[92](index=92&type=chunk) - The SEC's website (http://www.sec.gov) also contains reports and other information regarding issuers that file electronically[92](index=92&type=chunk) [Item 1A. Risk Factors](index=15&type=section&id=Item%201A.%20Risk%20Factors) This section details significant risks to common stock investment, including cybersecurity, business, spin-off, regulatory, and financial factors - The Cyber Incident poses significant risks, including system compromises, data theft, operational interference, legal liabilities, reputational harm, increased costs, and negative impacts on sales and renewals[99](index=99&type=chunk)[104](index=104&type=chunk) - Business and industry risks include fluctuating financial results, dependence on digital marketing, challenges in customer acquisition and retention, impacts of the COVID-19 pandemic, and risks associated with international operations and competition[109](index=109&type=chunk)[113](index=113&type=chunk)[117](index=117&type=chunk)[122](index=122&type=chunk)[125](index=125&type=chunk)[131](index=131&type=chunk) - Other notable risks involve the potential spin-off of the MSP business (which may not achieve anticipated benefits or could incur tax liabilities), compliance with global data privacy and export control regulations, intellectual property protection challenges, substantial indebtedness, and potential volatility in the company's stock price[96](index=96&type=chunk)[97](index=97&type=chunk)[162](index=162&type=chunk)[168](index=168&type=chunk)[174](index=174&type=chunk)[189](index=189&type=chunk)[211](index=211&type=chunk) [Summary of Risk Factors](index=15&type=section&id=Summary%20of%20Risk%20Factors) This section summarizes principal risks for common stock investment, directing readers to detailed discussions within the "Risk Factors" section - The summary highlights principal factors making an investment in common stock speculative or risky, including cybersecurity, business and industry, potential spin-off, government regulation, intellectual property, indebtedness, accounting and taxation, common stock ownership, and organizational structure[93](index=93&type=chunk)[94](index=94&type=chunk)[95](index=95&type=chunk)[96](index=96&type=chunk)[97](index=97&type=chunk)[98](index=98&type=chunk) [Risks Related to Cybersecurity and the Cyber Incident](index=15&type=section&id=Risks%20Related%20to%20Cybersecurity%20and%20the%20Cyber%20Incident) The Cyber Incident caused severe impacts, including system compromises, data theft, legal actions, and reputational harm, with uncertain future costs - Cyberattacks, including the Cyber Incident, can lead to compromises of systems, insertion of malicious code, theft of proprietary information, operational interference, and significant legal and financial liabilities[99](index=99&type=chunk)[100](index=100&type=chunk)[102](index=102&type=chunk) - The Cyber Incident has harmed the company's reputation, customer relations, and operations, leading to potential deferrals or cancellations of purchases/renewals and significant costs for investigations, remediation, and legal proceedings[104](index=104&type=chunk)[105](index=105&type=chunk)[106](index=106&type=chunk) - The company is subject to numerous lawsuits and governmental investigations, with uncertain outcomes that could result in substantial costs, penalties, and require changes to business operations, potentially increasing insurance costs[106](index=106&type=chunk)[107](index=107&type=chunk) [Risks Related to Our Business and Industry](index=18&type=section&id=Risks%20Related%20to%20Our%20Business%20and%20Industry) Business risks include fluctuating results, customer acquisition challenges, international operations, intense competition, acquisition integration, and talent retention - Quarterly revenue and operating results are difficult to predict and may fluctuate due to factors like sales lead generation, customer acquisition/retention, renewal rates, and the impact of the Cyber Incident and COVID-19[109](index=109&type=chunk)[113](index=113&type=chunk)[117](index=117&type=chunk)[120](index=120&type=chunk)[122](index=122&type=chunk) - International operations expose the company to risks such as currency fluctuations, regulatory complexities, intellectual property protection issues, political instability (e.g., Belarus, Brexit), and data privacy regulations (e.g., Schrems II)[125](index=125&type=chunk)[126](index=126&type=chunk)[127](index=127&type=chunk)[128](index=128&type=chunk)[129](index=129&type=chunk) - The company operates in highly competitive markets, faces risks from acquisitions (integration, liabilities, charges to earnings), depends on recruiting and retaining key employees, and must continuously innovate its product portfolio to meet evolving customer needs[131](index=131&type=chunk)[139](index=139&type=chunk)[142](index=142&type=chunk)[146](index=146&type=chunk)[149](index=149&type=chunk) [Risks Related to the Potential Spin-Off](index=29&type=section&id=Risks%20Related%20to%20the%20Potential%20Spin-Off) The MSP spin-off is complex, costly, and may not achieve benefits, risking operational disruption and significant tax liabilities if not tax-free - The potential spin-off of the MSP business involves significant time, expense, and management attention, which could disrupt ongoing operations and adversely affect financial performance[162](index=162&type=chunk) - There is no assurance that the spin-off will be completed as planned or achieve its anticipated strategic, financial, or operational benefits, potentially leaving both companies smaller and less diversified[163](index=163&type=chunk)[164](index=164&type=chunk) - If the spin-off does not qualify as a generally tax-free transaction for U.S. federal income tax purposes, SolarWinds, its stockholders, or the MSP business could incur significant tax liabilities[165](index=165&type=chunk)[167](index=167&type=chunk) [Risks Related to Government Regulation](index=30&type=section&id=Risks%20Related%20to%20Government%20Regulation) Global regulations on data privacy, export controls, and anti-corruption pose compliance risks, potentially leading to fines and reputational damage - The company is subject to various global data privacy and security regulations, including GDPR and the implications of the Schrems II case, which could result in increased costs and liabilities[168](index=168&type=chunk)[169](index=169&type=chunk) - Compliance with governmental export controls, economic sanctions, and anti-corruption laws (e.g., FCPA, U.K. Bribery Act) is critical, as violations could lead to substantial fines, penalties, and reputational harm[171](index=171&type=chunk)[172](index=172&type=chunk) - Evolving government regulation of the Internet and e-commerce, including potential new taxes or restrictions, could negatively affect the company's operating results[173](index=173&type=chunk) [Risks Related to Our Intellectual Property](index=31&type=section&id=Risks%20Related%20to%20Our%20Intellectual%20Property) Protecting and enforcing IP is challenging and costly, with open-source software use introducing additional risks of license violations and vulnerabilities - Protecting and enforcing intellectual property rights (patents, copyrights, trademarks, trade secrets) is crucial but entails significant expenses and risks of challenges, invalidation, or circumvention[174](index=174&type=chunk)[175](index=175&type=chunk)[176](index=176&type=chunk) - The software and technology industries are prone to frequent IP litigation, and claims of infringement could be costly, divert management resources, and potentially require the company to pay damages or cease offering certain products[181](index=181&type=chunk)[183](index=183&type=chunk)[184](index=184&type=chunk) - The use of open-source and third-party software in products carries risks, including unanticipated license conditions, potential litigation, security vulnerabilities, and difficulties in replacement, which could negatively affect business and operating results[186](index=186&type=chunk)[187](index=187&type=chunk) [Risks Related to Our Indebtedness](index=34&type=section&id=Risks%20Related%20to%20Our%20Indebtedness) Substantial **$1.9 billion** indebtedness creates financial risk, limiting cash flow and flexibility, with exposure to variable interest rates and foreign exchange - As of December 31, 2020, SolarWinds had substantial indebtedness of **$1.9 billion**, which could adversely affect financial health by dedicating cash flow to debt payments and increasing vulnerability to adverse economic conditions[189](index=189&type=chunk)[190](index=190&type=chunk) - Credit agreements contain restrictive covenants limiting the company's ability to incur additional debt, engage in mergers, pay dividends, or make investments, potentially hindering business strategy[191](index=191&type=chunk)[195](index=195&type=chunk) - Borrowings are subject to variable interest rates, exposing the company to interest rate risk, with uncertainties surrounding the transition from LIBOR after 2021, and foreign currency denominated debt introduces foreign exchange risk[197](index=197&type=chunk)[198](index=198&type=chunk) [Risks Related to Accounting and Taxation](index=35&type=section&id=Risks%20Related%20to%20Accounting%20and%20Taxation) Risks include interest rate fluctuations, internal control failures, and adverse impacts from changes in tax laws or accounting standards - Borrowings under credit facilities are subject to variable interest rates, exposing the company to interest rate risk, with the LIBOR transition after 2021 posing uncertainty[198](index=198&type=chunk) - Failure to maintain proper and effective internal controls over financial reporting could materially adversely affect business, operating results, and stock price, potentially leading to restatements or loss of investor confidence[201](index=201&type=chunk)[202](index=202&type=chunk)[203](index=203&type=chunk) - Changes in tax laws (e.g., U.S. Tax Act, proposed Biden tax changes) or interpretations, and potential challenges from tax authorities, could negatively impact the company's effective tax rate, cash tax liability, and financial performance[205](index=205&type=chunk)[206](index=206&type=chunk)[207](index=207&type=chunk)[209](index=209&type=chunk)[210](index=210&type=chunk) [Risks Related to Ownership of Our Common Stock](index=37&type=section&id=Risks%20Related%20to%20Ownership%20of%20Our%20Common%20Stock) Common stock price is volatile due to the Cyber Incident and market factors, with compliance costs and potential dilution from stock sales - The trading price of common stock could be volatile due to factors such as the Cyber Incident, product announcements, changes in customer perception, key personnel departures, and overall market conditions[211](index=211&type=chunk) - Being a public company imposes significant compliance requirements (Exchange Act, Sarbanes-Oxley, NYSE rules) that strain resources, increase costs, and can distract management[213](index=213&type=chunk)[214](index=214&type=chunk) - Sales of substantial amounts of common stock, including by Sponsors, or future issuances of capital stock for financings, acquisitions, or incentive plans, could dilute existing stockholders and reduce the market price[216](index=216&type=chunk)[218](index=218&type=chunk)[219](index=219&type=chunk) - The company does not intend to pay dividends on its common stock, except potentially if the MSP business spin-off proceeds[220](index=220&type=chunk) [Risks Related to Our Organizational Structure](index=40&type=section&id=Risks%20Related%20to%20Our%20Organizational%20Structure) Anti-takeover provisions and significant Sponsor influence, including potential conflicts of interest, characterize the organizational structure - The company's restated charter and bylaws contain anti-takeover provisions, such as a classified board, restrictions on director removal, and limitations on stockholder actions, which could delay or discourage takeover attempts[221](index=221&type=chunk)[222](index=222&type=chunk)[223](index=223&type=chunk) - The Sponsors beneficially owned **78.3%** of common stock as of December 31, 2020, giving them controlling influence over matters requiring stockholder approval and the right to designate a majority of the board of directors[224](index=224&type=chunk) - Directors affiliated with the Lead Sponsors may face conflicts of interest, and the Sponsors may pursue corporate opportunities independent of SolarWinds. The company's "controlled company" status allows exemptions from certain NYSE corporate governance requirements[226](index=226&type=chunk)[227](index=227&type=chunk)[231](index=231&type=chunk) [Item 1B. Unresolved Staff Comments](index=42&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments from the SEC regarding previous company filings - There are no unresolved staff comments[232](index=232&type=chunk) [Item 2. Properties](index=42&type=section&id=Item%202.%20Properties) SolarWinds leases all its office spaces, including its **348,000 square feet** Austin headquarters, deeming current facilities adequate - SolarWinds leases all its offices and does not own any real estate[233](index=233&type=chunk) - The corporate headquarters is in Austin, Texas, consisting of approximately **348,000 square feet**[233](index=233&type=chunk) - The company also leases office space internationally in locations such as Cork (Ireland), Manila (Philippines), Brno (Czech Republic), and Singapore[233](index=233&type=chunk) [Item 3. Legal Proceedings](index=43&type=section&id=Item%203.%20Legal%20Proceedings) Legal proceedings related to the Cyber Incident are detailed elsewhere; no other material proceedings are pending - Legal proceedings and government investigations related to the Cyber Incident are described in Item 7 and Note 16[235](index=235&type=chunk) - Other than the Cyber Incident, there are no material legal proceedings against the company or its subsidiaries[236](index=236&type=chunk) - The outcome of any legal proceedings is subject to significant uncertainty, and adverse resolutions could materially affect consolidated financial statements[236](index=236&type=chunk) [Item 4. Mine Safety Disclosures](index=43&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to SolarWinds Corporation - This item is not applicable[237](index=237&type=chunk) [PART II](index=44&type=section&id=PART%20II) This part covers common equity market information, management's financial analysis, market risks, financial statements, and internal controls [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=44&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) SolarWinds common stock (SWI) is listed on NYSE; no cash dividends paid, but **64,700** employee-held restricted shares were repurchased in Q4 2020 - SolarWinds common stock (SWI) has been listed on the NYSE since its IPO on October 19, 2018, priced at **$15.00 per share**[240](index=240&type=chunk) - The company has never declared or paid cash dividends on its common stock and intends to retain future earnings for business operations, with potential dividends only if the MSP business spin-off proceeds[242](index=242&type=chunk) Issuer Purchases of Securities (Q4 2020) | Period | Number of Shares Purchased | | :-------------------- | :------------------------- | | October 1-31, 2020 | — | | November 1-30, 2020 | 57,700 | | December 1-31, 2020 | 7,000 | | **Total** | **64,700** | - All repurchases in Q4 2020 related to employee-held restricted stock subject to vesting, not a publicly announced program[248](index=248&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=46&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes financial condition and operations, detailing Cyber Incident impacts, MSP spin-off, revenue, profitability, and cash flow Key Financial Highlights (Year Ended December 31, 2020 vs. 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :--------- | | Total Revenue | $1,019.2 | $932.5 | 9.3% | | Recurring Revenue (% of Total) | 85.8% | 82.3% | +3.5 pp | | Core IT Management Revenue | $716.8 | $669.1 | 7.1% | | MSP Product Revenue | $302.5 | $263.4 | 14.8% | | Subscription ARR | $435.1 | $371.6 | 17.1% | | Total ARR | $959.7 | $845.1 | 13.6% | | Net Income | $158.5 | $18.6 | 752.2% | | Adjusted EBITDA | $489.7 | $453.6 | 8.0% | | Cash Flows from Operations | $389.1 | $299.9 | 29.7% | - The Cyber Incident incurred **$3.5 million** in pretax expenses in 2020 and is expected to negatively impact future revenue, profitability, and cash flows due to ongoing investigations, legal proceedings, and increased security investments[258](index=258&type=chunk)[260](index=260&type=chunk)[279](index=279&type=chunk) - The potential spin-off of the MSP business incurred **$12.2 million** in exploration costs in 2020 and is targeted for Q2 2021, aiming to create two separately traded public companies[263](index=263&type=chunk)[266](index=266&type=chunk) [Overview](index=46&type=section&id=Overview_MD%26A) SolarWinds provides IT infrastructure management software, continuously innovating its broad product portfolio for hybrid IT environments - SolarWinds provides IT infrastructure management software, enabling organizations to monitor and manage performance across on-premises, cloud, and hybrid IT environments[250](index=250&type=chunk) - The company offers a broad portfolio of infrastructure-location-agnostic products for network, systems, desktop, application, storage, database, website infrastructures, and IT service desks[251](index=251&type=chunk) - SolarWinds plans to continue innovating and investing in product development to enhance functionality, ease of use, and integration of its products[251](index=251&type=chunk) [Cyber Incident](index=46&type=section&id=Cyber%20Incident_MD%26A) The December 2020 Orion cyberattack incurred **$3.5 million** in 2020 expenses, with ongoing investigations, lawsuits, and future costs expected - A cyberattack on the Orion Software Platform involved malicious code (Sunburst) injected into builds released between March and June 2020, potentially compromising customer servers[252](index=252&type=chunk)[253](index=253&type=chunk) - The company incurred **$3.5 million** in pretax expenses related to the Cyber Incident in 2020, primarily for investigation, remediation, legal, and professional services[258](index=258&type=chunk) - SolarWinds is subject to numerous lawsuits and government investigations, with significant future legal and professional services costs expected, and maintains **$15 million** in cybersecurity insurance coverage[259](index=259&type=chunk)[260](index=260&type=chunk)[261](index=261&type=chunk) [Impacts of COVID-19](index=47&type=section&id=Impacts%20of%20COVID-19) COVID-19 shifted the workforce remotely, impacting license revenue and accounts receivable, with uncertain long-term financial effects - SolarWinds transitioned nearly all its workforce to a remote working environment in response to the COVID-19 pandemic[262](index=262&type=chunk) - The pandemic has led to a decline in license revenue and an increase in the loss provision for accounts receivable[262](index=262&type=chunk) - The long-term impact of COVID-19 on the business, results of operations, and financial condition remains uncertain due to numerous evolving factors[262](index=262&type=chunk) [Potential Spin-Off of MSP Business](index=47&type=section&id=Potential%20Spin-Off%20of%20MSP%20Business_MD%26A) SolarWinds is exploring a tax-free MSP business spin-off, targeted for Q2 2021, incurring **$12.2 million** in 2020 exploration costs - SolarWinds is exploring a potential spin-off of its MSP business into a newly created and separately traded public company, with a Form 10 registration statement confidentially submitted to the SEC[263](index=263&type=chunk) - The spin-off, if completed, would be structured as a tax-free, pro-rata distribution to stockholders, allowing them to own shares in both companies, and is targeted for Q2 2021[265](index=265&type=chunk) - The company incurred **$12.2 million** in spin-off exploration costs during the year ended December 31, 2020, primarily for legal, accounting, and advisory fees[266](index=266&type=chunk) [Financial Highlights](index=49&type=section&id=Financial%20Highlights) In 2020, total revenue reached **$1.02 billion**, with **85.8%** recurring revenue, **$158.5 million** net income, and **$389.1 million** operating cash flow Revenue and Profitability Highlights (Year Ended December 31, 2020 vs. 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change | | :-------------------------------- | :------------------ | :------------------ | :------ | | Total Revenue | $1,019.2 | $932.5 | +9.3% | | Recurring Revenue (% of Total) | 85.8% | 82.3% | +3.5 pp | | Core IT Management Revenue | $716.8 | $669.1 | +7.1% | | MSP Product Revenue | $302.5 | $263.4 | +14.8% | | Subscription ARR | $435.1 | $371.6 | +17.1% | | Total ARR | $959.7 | $845.1 | +13.6% | | Net Income | $158.5 | $18.6 | +752.2% | | Adjusted EBITDA | $489.7 | $453.6 | +8.0% | | Cash Flows from Operations | $389.1 | $299.9 | +29.7% | - The increase in net income for 2020 includes a discrete tax benefit of **$138.2 million** related to an intra-group transfer of intellectual property rights[277](index=277&type=chunk) - The company had over **320,000 customers** as of December 31, 2020, with **1,057 customers** spending more than **$100,000**, up from **897** in 2019[272](index=272&type=chunk)[273](index=273&type=chunk) [Acquisitions](index=50&type=section&id=Acquisitions) In October 2020, SolarWinds acquired SentryOne for **$145.1 million**, enhancing database performance monitoring solutions - In October 2020, SolarWinds acquired SentryOne, a provider of database performance monitoring and DataOps solutions, for approximately **$145.1 million**[280](index=280&type=chunk) - The acquisition was funded with cash on hand and complements existing database management offerings, strengthening support for Microsoft and Microsoft Azure environments[280](index=280&type=chunk) [Components of Our Results of Operations](index=51&type=section&id=Components%20of%20Our%20Results%20of%20Operations) Revenue includes recurring and license components, operating expenses are significant, and a **$138.2 million** tax benefit arose from an IP transfer - Revenue consists of recurring revenue (subscription and maintenance) and perpetual license revenue, with subscription options for on-premises products launched in April 2020[283](index=283&type=chunk)[284](index=284&type=chunk)[285](index=285&type=chunk) - Operating expenses include sales and marketing, research and development, general and administrative, and amortization of acquired intangibles, with personnel costs being the most significant component[285](index=285&type=chunk)[287](index=287&type=chunk) - A discrete tax benefit of **$138.2 million** was recognized in 2020 due to an intra-group transfer of intellectual property rights to the Irish subsidiary, impacting the effective tax rate[291](index=291&type=chunk) [Comparison of the Years Ended December 31, 2020 and 2019](index=52&type=section&id=Comparison%20of%20the%20Years%20Ended%20December%2031%2C%202020%20and%202019) Total revenue grew **9.3%** to **$1.02 billion** in 2020, driven by recurring revenue, while operating expenses increased, and a **$128.2 million** tax benefit was recorded Revenue Comparison (2020 vs. 2019) | Revenue Type | 2020 (in thousands) | 2019 (in thousands) | Change (Amount) | Change (%) | | :-------------------- | :------------------ | :------------------ | :-------------- | :--------- | | Subscription | $396,496 | $320,747 | $75,749 | 23.6% | | Maintenance | $478,284 | $446,450 | $31,834 | 7.1% | | Total Recurring Revenue | $874,780 | $767,197 | $107,583 | 14.0% | | License | $144,461 | $165,328 | $(20,867) | (12.6)% | | **Total Revenue** | **$1,019,241** | **$932,525** | **$86,716** | **9.3%** | Operating Expenses Comparison (2020 vs. 2019) | Expense Type | 2020 (in thousands) | 2019 (in thousands) | Change (Amount) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :-------------- | :--------- | | Sales and marketing | $298,452 | $264,199 | $34,253 | 13.0% | | Research and development | $126,216 | $110,362 | $15,854 | 14.4% | | General and administrative | $137,541 | $97,525 | $40,016 | 41.0% | | Amortization of acquired intangibles | $74,973 | $69,812 | $5,161 | 7.4% | | **Total Operating Expenses** | **$637,182** | **$541,898** | **$95,284** | **17.6%** | - Net interest expense decreased by **$32.2 million (29.8%)** due to lower interest rates (weighted-average **3.4%** in 2020 vs. **5.0%** in 2019)[304](index=304&type=chunk) - Income tax benefit was **$128.2 million** in 2020, a significant change from an **$8.9 million** expense in 2019, primarily due to a **$138.2 million** discrete tax benefit from an intra-group IP transfer[306](index=306&type=chunk) [Comparison of the Years Ended December 31, 2019 and 2018](index=55&type=section&id=Comparison%20of%20the%20Years%20Ended%20December%2031%2C%202019%20and%202018) For 2019 and 2018 operational comparisons, refer to the company's 2019 annual report on Form 10-K - For a comparison of results of operations for the years ended December 31, 2019 and 2018, refer to Part II, Item 7 of the annual report on Form 10-K for the year ended December 31, 2019[307](index=307&type=chunk) [Non-GAAP Financial Measures](index=55&type=section&id=Non-GAAP%20Financial%20Measures) Non-GAAP measures like Adjusted EBITDA provide insights into core operating performance by excluding non-recurring and non-cash items - Non-GAAP financial measures are used to clarify and enhance understanding of performance, excluding impacts not considered part of core operating results[308](index=308&type=chunk) - Adjustments include purchase accounting, amortization of acquired intangibles, stock-based compensation, acquisition and other costs, spin-off exploration costs, restructuring costs, and Cyber Incident costs[312](index=312&type=chunk)[313](index=313&type=chunk)[314](index=314&type=chunk)[315](index=315&type=chunk) Non-GAAP Financial Measures (2020 vs. 2019) | Metric | 2020 (in thousands) | 2019 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Non-GAAP Total Revenue | $1,021,781 | $938,455 | | Non-GAAP Operating Income | $466,425 | $436,210 | | Non-GAAP Operating Margin | 45.6% | 46.5% | | Adjusted EBITDA | $489,716 | $453,633 | | Adjusted EBITDA Margin | 47.9% | 48.3% | [Liquidity and Capital Resources](index=59&type=section&id=Liquidity%20and%20Capital%20Resources) SolarWinds held **$370.5 million** in cash and **$1.9 billion** in debt as of December 31, 2020, with sufficient liquidity for the next 12 months Cash and Indebtedness (as of December 31, 2020) | Metric | Amount (in millions) | | :-------------------------------- | :------------------- | | Cash and Cash Equivalents | $370.5 | | International Cash Holdings | $163.4 | | Total Indebtedness | $1,902.6 | | Available Revolving Credit Facility | $125.0 | - The company believes existing cash, operating cash flows, and borrowing capacity are sufficient to fund operations and debt repayments for at least the next 12 months, despite potential impacts from the Cyber Incident and COVID-19[321](index=321&type=chunk) Cash Flow Summary (Year Ended December 31, 2020 vs. 2019) | Cash Flow Type | 2020 (in thousands) | 2019 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Net cash provided by operating activities | $389,094 | $299,907 | | Net cash used in investing activities | $(180,127) | $(482,453) | | Net cash used in financing activities | $(25,556) | $(25,624) | - Operating cash flow increased due to higher net income adjusted for non-cash items, including a deferred tax asset from the IP Transfer. Investing cash flow decreased due to fewer acquisitions[329](index=329&type=chunk)[330](index=330&type=chunk) [Critical Accounting Policies and Estimates](index=61&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Financial statements rely on critical estimates for goodwill, revenue recognition, income taxes, and loss contingencies, sensitive to changing assumptions - Critical accounting policies involve significant judgment and estimates for goodwill, intangibles, long-lived assets, contingent consideration, revenue recognition, stock-based compensation, income taxes, and loss contingencies[337](index=337&type=chunk) - A quantitative goodwill impairment assessment was performed as of December 31, 2020, due to the Cyber Incident, using income and market approaches. Core IT and ITSM reporting units' fair values exceeded carrying values by approximately **15.6%** and **17.4%**, respectively, with no impairment recognized[343](index=343&type=chunk)[344](index=344&type=chunk) - The intra-group IP transfer to Ireland resulted in a **$138.2 million** deferred tax asset and related tax benefit, requiring significant judgment in fair value determination and evaluation of associated tax laws[356](index=356&type=chunk) - Revenue recognition involves a five-step process, with significant judgment in identifying performance obligations and allocating transaction prices based on estimated standalone selling prices[347](index=347&type=chunk)[348](index=348&type=chunk)[349](index=349&type=chunk) [Off-Balance Sheet Arrangements](index=64&type=section&id=Off-Balance%20Sheet%20Arrangements) SolarWinds had no material off-balance sheet arrangements as of December 31, 2020 - As of December 31, 2020, SolarWinds had no relationships with unconsolidated organizations or financial partnerships for off-balance sheet arrangements[359](index=359&type=chunk) [Recent Accounting Pronouncements](index=64&type=section&id=Recent%20Accounting%20Pronouncements) Refer to Note 2, "Summary of Significant Accounting Policies," for recent accounting pronouncements - A full description of recent accounting pronouncements is incorporated by reference from Note 2, "Summary of Significant Accounting Policies"[360](index=360&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=64&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Market risks include interest rate fluctuations on **$1.9 billion** variable-rate debt and foreign currency exchange rate movements - SolarWinds has **$1.9 billion** in total indebtedness with variable interest rates, exposing it to interest rate risk[363](index=363&type=chunk) Interest Rate Sensitivity (as of December 31, 2020) | Scenario | Impact on Annual Interest Expense | | :-------------------------------- | :-------------------------------- | | Hypothetical 100 bps increase | ~$19.3 million | | Weighted-average rate on borrowings | 2.90% | | Total Indebtedness | $1.9 billion | - The company faces foreign currency exchange risk from international operations, primarily in Euro, British Pound Sterling, and Australian Dollar, impacting reported revenue, expenses, and balance sheet accounts[366](index=366&type=chunk)[367](index=367&type=chunk) - Foreign currency transaction risk is managed using purchased foreign currency forward contracts, but translation risk from converting foreign subsidiary financial statements into USD remains[369](index=369&type=chunk)[370](index=370&type=chunk)[372](index=372&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=66&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) Consolidated financial statements, including balance sheets, statements of operations, and cash flows, are incorporated by reference - The consolidated financial statements, including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity (deficit), and cash flows, are incorporated by reference[374](index=374&type=chunk) - Schedule II—Valuation and Qualifying Accounts is also included as a financial statement schedule[397](index=397&type=chunk) [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=66&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) No changes in or disagreements with accountants on accounting and financial disclosure occurred during the period - There were no changes in or disagreements with the accountants on accounting and financial disclosure matters[375](index=375&type=chunk) [Item 9A. Controls and Procedures](index=66&type=section&id=Item%209A.%20Controls%20and%20Procedures) Disclosure controls and internal control over financial reporting were effective as of December 31, 2020, excluding a recent acquisition - Management, with the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2020[376](index=376&type=chunk)[378](index=378&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[380](index=380&type=chunk) - SQL Sentry Holdings, LLC, acquired during 2020, was excluded from management's assessment of internal control over financial reporting[381](index=381&type=chunk)[382](index=382&type=chunk) - There were no material changes in internal control over financial reporting during the quarter ended December 31, 2020[384](index=384&type=chunk) [Item 9B. Other Information](index=68&type=section&id=Item%209B.%20Other%20Information) No other information is required to be disclosed under Item 9B - No other information is required under Item 9B[385](index=385&type=chunk) [PART III](index=69&type=section&id=PART%20III) This part incorporates information on directors, executive compensation, security ownership, related transactions, and principal accountant fees [Item 10. Directors, Executive Officers and Corporate Governance](index=69&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement[389](index=389&type=chunk) - The company's Code of Business Ethics and Conduct is available on its investor relations website[390](index=390&type=chunk) [Item 11. Executive Compensation](index=69&type=section&id=Item%2011.%20Executive%20Compensation) Executive compensation information is incorporated by reference from the 2021 Proxy Statement - Information on executive compensation is incorporated by reference from the Proxy Statement[391](index=391&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=69&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership information for beneficial owners and management is incorporated by reference from the 2021 Proxy Statement - Information on security ownership of certain beneficial owners and management is incorporated by reference from the Proxy Statement[392](index=392&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=69&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on related transactions and director independence is incorporated by reference from the 2021 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement[393](index=393&type=chunk) [Item 14. Principal Accountant Fees and Services](index=69&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Principal accountant fees and services information is incorporated by reference from the 2021 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the Proxy Statement[394](index=394&type=chunk) [PART IV](index=70&type=section&id=PART%20IV) This part includes exhibits, financial statement schedules, and the required signatures for the report [Item 15. Exhibits, Financial Statement Schedules](index=70&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists financial statements, schedules, and a comprehensive exhibit index, including various agreements and certifications - The report includes consolidated financial statements and Schedule II—Valuation and Qualifying Accounts[397](index=397&type=chunk) - The Exhibit Index lists various documents incorporated by reference, such as the Share Purchase Agreement, Credit Agreements, Stockholders' Agreement, Equity Plans, and Employment Agreements[399](index=399&type=chunk)[401](index=401&type=chunk)[403](index=403&type=chunk)[405](index=405&type=chunk) - Certifications from the Chief Executive Officer and Chief Financial Officer, along with XBRL Instance Document and Taxonomy Extension files, are also included as exhibits[405](index=405&type=chunk) [Item 16. Form 10-K Summary](index=73&type=section&id=Item%2016.%20Form%2010-K%20Summary) No Form 10-K Summary is provided in this section - No Form 10-K Summary is provided[406](index=406&type=chunk) [Signatures](index=74&type=section&id=Signatures) This section contains the signatures of SolarWinds Corporation's authorized officers and Board of Directors - The report is signed by the President and Chief Executive Officer (Sudhakar Ramakrishna) and Chief Financial Officer (J. Barton Kalsu) as principal executive and financial/accounting officers, respectively[411](index=411&type=chunk)[412](index=412&type=chunk) - Members of the Board of Directors also signed the report[412](index=412&type=chunk)

Financial Data and Key Metrics Changes - SolarWinds achieved non-GAAP revenues of over $1 billion in 2020, representing a 9% year-over-year growth [10][24] - Non-GAAP subscription revenue grew by 22% for the full year 2020, reaching $399 million [24][25] - Adjusted EBITDA margin was 48% for both Q4 and the full year 2020, with adjusted EBITDA totaling $489.7 million for the year [10][26] Business Line Data and Key Metrics Changes - Non-GAAP subscription revenue for Q4 was $106.6 million, up 20% year-over-year, driven by a 16% growth in the MSP business [23] - Non-GAAP license revenue for Q4 was $34.5 million, a decline of approximately 23% compared to Q4 2019, impacted by the pandemic and the cyberattack [21] - The MSP business delivered double-digit growth of 15% in both Q4 and the full year, surpassing $300 million in revenue for 2020 [11][12] Market Data and Key Metrics Changes - Total ARR reached approximately $960 million as of December 31, 2020, reflecting year-over-year growth of 14% [22] - Maintenance renewal rates remained strong, exceeding 90% in 2020, despite the challenges faced [10][20] Company Strategy and Development Direction - The company aims to integrate its platforms to support hybrid IT needs, focusing on automation, monitoring, and remediation [34][66] - SolarWinds plans to expand its international go-to-market investments and enhance its customer success model [35] - The potential spin-off of the MSP business, now branded as Enable, is targeted for completion in the second quarter of 2021 [12][31] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about growth in 2021, despite near-term headwinds from the cyberattack and pandemic [28] - The company is focused on enhancing security measures and developing a secure software development model [16][18] - Management believes that the cyberattack has validated the importance of digital transformation for SMEs, leading to sustained demand for their solutions [23] Other Important Information - The company has formed a new technology and cybersecurity committee to oversee its response to the cyber incident [18] - Investments in security-related initiatives are expected to cost approximately $20 million to $25 million in 2021 [48][81] Q&A Session Summary Question: Improvement in demand picture for subscriptions - Management expects demand for subscriptions to bottom in March and improve throughout the year [42] Question: Future liability and potential litigation related to SUNBURST - Management indicated that licensing agreements may cover potential liabilities, as vulnerabilities are common across the industry [46][47] Question: Pace of new business in Q1 - The pace of new business has been impacted by the cyberattack, but positive trends are expected [54] Question: Churn in federal vs. non-federal sectors - It is too early to quantify churn, but most customers have upgraded and renewed contracts [72][74] Question: Growth trajectory of the MSP business - The MSP business experienced 15% growth in 2020, with expectations for high-teens growth on a normalized basis [75][76] Question: Offering concessions to renewing customers - Conversations regarding renewals have been normal, with no significant concessions offered [79] Question: Long-term impact of investments on margins - Margins are expected to be lowest in Q1, improving as the year progresses, with some investments yielding returns in the latter half of 2021 [81][82]

Q4'20 Results February 25, 2021 © 2021 SolarWinds Worldwide, LLC. All rights reserved. General Disclaimer Forward-Looking Statements 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, the impact of the cyberattack on our Orion Software Platform and internal systems disclosed in December 2020 (the "Cyber Inci ...

[Safe Harbor Cautionary Statement](index=3&type=section&id=Safe%20Harbor%20Cautionary%20Statement) This section provides a cautionary statement regarding forward-looking information, outlining inherent risks and the company's policy on updating such statements [Forward-Looking Statements and Risk Factors](index=3&type=section&id=Forward-Looking%20Statements%20and%20Risk%20Factors) This section outlines the nature of forward-looking statements within the report, identifying common terms used and listing various known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially - Forward-looking statements are identified by terms such as **"aim," "anticipate," "believe," "expect," "intend," "plan," "may," "will,"** and similar expressions[9](index=9&type=chunk) - Key factors that could cause actual results to differ include expectations regarding financial condition, product development, acquisitions, personnel hiring, international earnings, capital expenditures, the impact of the COVID-19 pandemic, sufficiency of cash, and the potential spin-off of the MSP business[10](index=10&type=chunk) - The company assumes no obligation to publicly update these forward-looking statements, except as required by law[11](index=11&type=chunk) [PART I - FINANCIAL INFORMATION](index=5&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) This part presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This section provides the unaudited condensed consolidated financial statements of SolarWinds Corporation, including the balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, for the periods ended September 30, 2020, and December 31, 2019 (for balance sheet) or September 30, 2019 (for income statements and cash flows), along with integral notes [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This statement presents the company's financial position, detailing assets, liabilities, and stockholders' equity as of December 31, 2019, and September 30, 2020 Condensed Consolidated Balance Sheets (in thousands) | Metric | Dec 31, 2019 (in thousands) | Sep 30, 2020 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total assets | 5,449,999 | 5,310,742 | (139,257) | | Total liabilities | 2,667,571 | 2,661,220 | (6,351) | | Total stockholders' equity | 2,649,522 | 2,782,428 | 132,906 | | Cash and cash equivalents | 173,372 | 424,986 | 251,614 | | Goodwill | 4,058,198 | 4,108,746 | 50,548 | | Long-term debt, net | 1,893,406 | 1,885,352 | (8,054) | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This statement details the company's revenues, expenses, and net income for the three and nine months ended September 30, 2020, and 2019 Condensed Consolidated Statements of Operations (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | Change (YoY) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change (YoY) | | :-------------------- | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Total revenue | 260,982 | 240,490 | 8.5% | 753,947 | 685,030 | 10.1% | | Subscription revenue | 100,564 | 83,122 | 21.0% | 290,039 | 233,467 | 24.2% | | Maintenance revenue | 121,134 | 113,755 | 6.5% | 353,981 | 330,840 | 7.0% | | License revenue | 39,284 | 43,613 | -9.9% | 109,927 | 120,723 | -8.9% | | Gross profit | 192,035 | 175,704 | 9.3% | 551,351 | 494,910 | 11.4% | | Operating income | 35,105 | 34,419 | 2.0% | 97,929 | 94,544 | 3.6% | | Net income | 12,502 | 4,393 | 184.6% | 25,762 | 5,419 | 375.4% | | Basic EPS | 0.04 | 0.01 | 300.0% | 0.08 | 0.02 | 300.0% | | Diluted EPS | 0.04 | 0.01 | 300.0% | 0.08 | 0.02 | 300.0% | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) This statement presents the company's net income and other comprehensive income (loss) components for the three and nine months ended September 30, 2020, and 2019 Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | 12,502 | 4,393 | 25,762 | 5,419 | | Foreign currency translation adjustment | 59,039 | (54,446) | 56,388 | (60,994) | | Comprehensive income (loss) | 71,541 | (50,053) | 82,150 | (55,575) | - Comprehensive income for the three months ended September 30, 2020, was **$71.5 million**, a significant increase from a comprehensive loss of **$(50.1) million** in the same period of 2019, primarily due to a foreign currency translation adjustment gain[21](index=21&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) This statement details changes in the company's stockholders' equity, including common stock, additional paid-in capital, and accumulated comprehensive income (loss), from December 31, 2019, to September 30, 2020 Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | Balance at Dec 31, 2019 | Balance at Sep 30, 2020 | Change | | :-------------------------------- | :---------------------- | :---------------------- | :----- | | Common Stock (Amount) | 308 | 311 | 3 | | Additional Paid-in Capital | 3,041,880 | 3,092,633 | 50,753 | | Accumulated Other Comprehensive Income (Loss) | (5,247) | 51,141 | 56,388 | | Accumulated Deficit | (387,419) | (361,657) | 25,762 | | Total Stockholders' Equity | 2,649,522 | 2,782,428 | 132,906 | - Total stockholders' equity increased by **$132.9 million** from December 31, 2019, to September 30, 2020, driven by net income, foreign currency translation adjustments, and stock-based compensation[16](index=16&type=chunk)[24](index=24&type=chunk)[26](index=26&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement summarizes the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2020, and 2019 Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | | Net cash provided by operating activities | 285,017 | 216,846 | 68,171 | | Net cash used in investing activities | (27,280) | (359,537) | 332,257 | | Net cash used in financing activities | (11,448) | (13,805) | 2,357 | | Effect of exchange rate changes on cash and cash equivalents | 5,325 | (5,064) | 10,389 | | Net increase (decrease) in cash and cash equivalents | 251,614 | (161,560) | 413,174 | | Cash and cash equivalents, End of period | 424,986 | 221,060 | 203,926 | - Net cash provided by operating activities increased by **$68.2 million**, while net cash used in investing activities decreased significantly by **$332.3 million**, primarily due to lower acquisition spending[29](index=29&type=chunk) [Notes to the Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures integral to understanding the condensed consolidated financial statements, covering accounting policies, estimates, and significant events [1. Organization and Nature of Operations](index=11&type=section&id=1.%20Organization%20and%20Nature%20of%20Operations) This note describes SolarWinds Corporation as a leading provider of IT infrastructure management software, detailing its business model and customer base - SolarWinds Corporation is a leading provider of IT infrastructure management software, enabling organizations to monitor and manage IT environments across on-premise, cloud, or hybrid models[31](index=31&type=chunk) - The company's **"SolarWinds Model"** combines powerful, scalable, affordable, easy-to-use products with a high-velocity, low-touch sales approach[31](index=31&type=chunk) - The customer base includes network and systems engineers, database administrators, storage administrators, DevOps, service desk professionals, and managed service providers (MSPs)[31](index=31&type=chunk) [2. Summary of Significant Accounting Policies](index=11&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the key accounting principles and methods used in preparing the financial statements, including those related to estimates, new pronouncements, and fair value measurements [Potential Spin-Off of MSP Business](index=11&type=section&id=Potential%20Spin-Off%20of%20MSP%20Business_Note) This section details the board's authorization to explore spinning off the MSP business into a separate public company, aiming for distinct business strategies - On August 6, 2020, the board authorized exploring a potential spin-off of its MSP business into a newly created and separately traded public company[34](index=34&type=chunk) - If completed, the standalone MSP entity would provide IT service management solutions for MSPs, while SolarWinds would retain its Core IT Management business[34](index=34&type=chunk) - The spin-off would be structured as a tax-free, pro-rata distribution to shareholders, who would own shares of both companies[34](index=34&type=chunk) [Use of Estimates](index=11&type=section&id=Use%20of%20Estimates) This section highlights management's reliance on estimates and assumptions for financial reporting, particularly concerning asset valuations, revenue recognition, and the COVID-19 impact - The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures[35](index=35&type=chunk) - Significant accounting judgments include the valuation of goodwill, intangibles, long-lived assets, contingent consideration, revenue recognition, stock-based compensation, and income taxes[35](index=35&type=chunk)[36](index=36&type=chunk) - Estimates of the COVID-19 pandemic's impact did not result in material adjustments for the reported periods, but actual results may differ materially from these estimates[35](index=35&type=chunk) [Recently Adopted Accounting Pronouncements](index=11&type=section&id=Recently%20Adopted%20Accounting%20Pronouncements) This section details the adoption of FASB ASC No. 2017-04, simplifying goodwill impairment accounting, and its non-material impact on the financial statements - On January 1, 2020, the company adopted **FASB ASC No. 2017-04 "Intangibles-Goodwill and Other,"** which simplifies goodwill impairment accounting by removing step two of the two-step quantitative test[36](index=36&type=chunk)[38](index=38&type=chunk) - The adoption of this standard did not have a material impact on the condensed consolidated financial statements for the nine months ended September 30, 2020[38](index=38&type=chunk) [Fair Value Measurements](index=13&type=section&id=Fair%20Value%20Measurements_Note) This section explains the company's application of fair value measurement guidance, categorizing inputs into a three-tiered hierarchy and noting the approximation of fair value for certain assets and liabilities - The company applies authoritative guidance on fair value measurements, categorizing inputs into a three-tiered hierarchy: **Level 1** (unadjusted quoted prices in active markets), **Level 2** (observable inputs other than Level 1), and **Level 3** (unobservable inputs)[39](index=39&type=chunk)[40](index=40&type=chunk) - The carrying amounts for cash, accounts receivable, accounts payable, and other accrued expenses approximate fair value due to their relatively short periods to maturity[41](index=41&type=chunk) [Accumulated Other Comprehensive Income (Loss)](index=13&type=section&id=Accumulated%20Other%20Comprehensive%20Income%20(Loss)) This section details the shift in accumulated other comprehensive income from a loss to a gain, primarily driven by foreign currency translation adjustments Accumulated Other Comprehensive Income (Loss) (in thousands) | Metric (in thousands) | Balance at Dec 31, 2019 | Other comprehensive gain (loss) before reclassification | Balance at Sep 30, 2020 | | :-------------------------------- | :---------------------- | :---------------------------------------------------- | :---------------------- | | Foreign Currency Translation Adjustments | (5,247) | 56,388 | 51,141 | | Total Accumulated Other Comprehensive Income (Loss) | (5,247) | 56,388 | 51,141 | - Accumulated other comprehensive income (loss) shifted from a loss of **$(5.2 million)** at December 31, 2019, to a gain of **$51.1 million** at September 30, 2020, primarily due to a foreign currency translation adjustment gain of **$56.4 million**[42](index=42&type=chunk) [Deferred Revenue](index=13&type=section&id=Deferred%20Revenue) This section outlines the changes in deferred revenue balances and the expected recognition schedule for future periods Deferred Revenue (in thousands) | Metric (in thousands) | Amount | | :-------------------------------- | :----- | | Balance at December 31, 2019 | 343,400 | | Deferred revenue recognized | (374,081) | | Additional amounts deferred | 388,833 | | Balance at September 30, 2020 | 358,152 | - Total deferred revenue increased from **$343.4 million** at December 31, 2019, to **$358.2 million** at September 30, 2020[43](index=43&type=chunk) - The company expects to recognize **$323.3 million** of deferred revenue within one year, **$34.4 million** in 1-3 years, and **$0.5 million** in more than 3 years[43](index=43&type=chunk) [Deferred Commissions](index=14&type=section&id=Deferred%20Commissions) This section presents the balance of deferred commissions, categorized into current and non-current portions, as of December 31, 2019, and September 30, 2020 Deferred Commissions (in thousands) | Metric (in thousands) | Dec 31, 2019 | Sep 30, 2020 | | :-------------------------------- | :----------- | :----------- | | Balance | 10,624 | 13,647 | | Current | 2,543 | 3,370 | | Non-current | 8,081 | 10,277 | - Deferred commissions increased from **$10.6 million** at December 31, 2019, to **$13.6 million** at September 30, 2020[45](index=45&type=chunk) [Cost of Revenue](index=14&type=section&id=Cost%20of%20Revenue_Note) This section details the amortization of acquired license and subscription technologies, which are components of the cost of revenue, for the reported periods Cost of Revenue - Amortization of Acquired Technologies (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Amortization of acquired license technologies | 36,111 | 35,646 | 107,237 | 107,224 | | Amortization of acquired subscription technologies | 9,352 | 8,526 | 27,552 | 24,737 | | Total amortization of acquired technologies | 45,463 | 44,172 | 134,789 | 131,961 | - Amortization of acquired technologies, a component of cost of revenue, totaled **$45.5 million** for the three months ended September 30, 2020, and **$134.8 million** for the nine months ended September 30, 2020[46](index=46&type=chunk) - Interim condensed consolidated financial statements are prepared in conformity with GAAP and SEC reporting regulations, reflecting all normal adjustments but not all GAAP footnotes[32](index=32&type=chunk)[33](index=33&type=chunk) - Management makes estimates and assumptions, particularly impacted by the COVID-19 pandemic, though no material adjustments resulted from COVID-19 estimates for the reported periods[35](index=35&type=chunk) - The company adopted **FASB ASC No. 2017-04 "Intangibles-Goodwill and Other"** on January 1, 2020, simplifying goodwill impairment accounting, with no material impact on the financial statements[36](index=36&type=chunk)[38](index=38&type=chunk) [3. Goodwill](index=14&type=section&id=3.%20Goodwill) This note details the changes in the company's goodwill balance, primarily due to foreign currency translation and other adjustments Goodwill (in thousands) | Metric (in thousands) | Amount | | :-------------------------------- | :----- | | Balance at December 31, 2019 | 4,058,198 | | Foreign currency translation and other adjustments | 50,548 | | Balance at September 30, 2020 | 4,108,746 | - Goodwill increased by **$50.5 million** from **$4.06 billion** at December 31, 2019, to **$4.11 billion** at September 30, 2020, primarily due to foreign currency translation and other adjustments[47](index=47&type=chunk) [4. Fair Value Measurements](index=14&type=section&id=4.%20Fair%20Value%20Measurements_Note) This note provides a summary of financial assets measured at fair value on a recurring basis, highlighting the significant increase in money market funds Fair Value Measurements (in thousands) | Metric (in thousands) | Sep 30, 2020 (Total) | Dec 31, 2019 (Total) | | :-------------------- | :------------------- | :------------------- | | Money market funds | 130,000 | 4,559 | | Trading security | 5,187 | 5,000 | | Total assets | 135,187 | 9,559 | - Total financial assets measured at fair value on a recurring basis increased significantly from **$9.6 million** at December 31, 2019, to **$135.2 million** at September 30, 2020, primarily due to an increase in money market funds[49](index=49&type=chunk)[51](index=51&type=chunk) - There were no transfers between fair value measurement levels during the nine months ended September 30, 2020[48](index=48&type=chunk) [5. Debt](index=16&type=section&id=5.%20Debt) This note details the company's debt structure, including the First Lien Term Loan, its principal amount, and the effective interest rate Debt (in thousands, except rates) | Metric (in thousands, except rates) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------------- | :----------- | :----------- | | First Lien Term Loan (principal) | 1,935,275 | 1,950,200 | | Effective Rate (First Lien Term Loan) | 2.90% | 4.55% | | Total principal amount | 1,935,275 | 1,950,200 | | Unamortized discount and debt issuance costs | (30,023) | (36,894) | | Total debt | 1,905,252 | 1,913,306 | | Less: Current portion of long-term debt | (19,900) | (19,900) | | Total long-term debt | 1,885,352 | 1,893,406 | - Total principal amount of debt decreased from **$1.95 billion** at December 31, 2019, to **$1.94 billion** at September 30, 2020[52](index=52&type=chunk) - The effective interest rate on the First Lien Term Loan decreased from **4.55%** at December 31, 2019, to **2.90%** at September 30, 2020[52](index=52&type=chunk) [Senior Secured First Lien Credit Facilities](index=16&type=section&id=Senior%20Secured%20First%20Lien%20Credit%20Facilities) This section describes the company's credit facilities, including the First Lien Term Loan and revolving credit facility, and their terms - As of September 30, 2020, the First Lien Credit Agreement provides for a **$1.99 billion** First Lien Term Loan due February 5, 2024, and a **$125.0 million** revolving credit facility[53](index=53&type=chunk)[56](index=56&type=chunk) - Borrowings under the First Lien Term Loan bear interest at a floating rate (Eurodollar rate + 2.75% or base rate + 1.75%), subject to a **0.0% Eurodollar floor**[54](index=54&type=chunk) - The company was in compliance with all covenants of the First Lien Credit Agreement as of September 30, 2020[59](index=59&type=chunk) [6. Earnings Per Share](index=17&type=section&id=6.%20Earnings%20Per%20Share) This note presents the basic and diluted earnings per share, along with the weighted-average shares used in their computation, for the reported periods Earnings Per Share (in thousands, except EPS) | Metric (in thousands, except EPS) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income available to common stockholders | 12,433 | 4,350 | 25,597 | 5,359 | | Basic earnings per share | 0.04 | 0.01 | 0.08 | 0.02 | | Diluted earnings per share | 0.04 | 0.01 | 0.08 | 0.02 | | Shares used in computation of basic EPS | 310,894 | 306,890 | 310,028 | 306,381 | | Shares used in computation of diluted EPS | 316,721 | 311,102 | 314,814 | 310,607 | - Basic and diluted EPS increased to **$0.04** for the three months ended September 30, 2020 (from **$0.01** in 2019), and to **$0.08** for the nine months ended September 30, 2020 (from **$0.02** in 2019)[60](index=60&type=chunk) - Weighted-average shares used in diluted EPS computation increased for both the three-month and nine-month periods ended September 30, 2020, compared to 2019[60](index=60&type=chunk) [7. Income Taxes](index=18&type=section&id=7.%20Income%20Taxes) This note details the company's income tax expense and effective tax rates, explaining the factors influencing changes, and outlines ongoing tax examinations Income Taxes (in thousands, except rates) | Metric (in thousands, except rates) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income before income taxes | 17,766 | 7,288 | 37,787 | 12,073 | | Income tax expense | 5,264 | 2,895 | 12,025 | 6,654 | | Effective tax rate | 29.6% | 39.7% | 31.8% | 55.1% | - The effective tax rate decreased for both the three-month (**29.6%** vs. **39.7%**) and nine-month (**31.8%** vs. **55.1%**) periods ended September 30, 2020, primarily due to increased income before taxes and a full valuation allowance against deferred tax assets from the Samanage acquisition[63](index=63&type=chunk) - Accrued interest and penalties related to unrecognized tax benefits totaled approximately **$6.4 million** at September 30, 2020[64](index=64&type=chunk) - The company is currently under examination by various tax authorities (IRS, Indian Tax Authority, California, Massachusetts, Texas) for different tax years[65](index=65&type=chunk) [8. Commitments and Contingencies](index=18&type=section&id=8.%20Commitments%20and%20Contingencies) This note addresses the company's involvement in legal proceedings, stating that their resolution is not expected to materially impact financial statements, despite inherent uncertainties - The company is involved in various legal proceedings arising in the ordinary course of business[68](index=68&type=chunk) - Management believes the resolution of pending claims is not expected to have a material adverse impact on consolidated financial statements, cash flows, or financial position[68](index=68&type=chunk) - The outcome of disputes is inherently uncertain, and an unfavorable resolution could materially affect future results of operations or cash flows[68](index=68&type=chunk) [9. Subsequent Events](index=18&type=section&id=9.%20Subsequent%20Events) This note discloses significant events occurring after the reporting period, including a key acquisition and an intra-group intellectual property transfer [SentryOne Acquisition](index=18&type=section&id=SentryOne%20Acquisition) This section details the acquisition of SentryOne in October 2020 for approximately $142.5 million, enhancing the company's database management offerings - In October 2020, SolarWinds acquired SQL Sentry Holdings, LLC (SentryOne), a database performance monitoring and DataOps solutions provider, for approximately **$142.5 million**, funded with cash on hand[69](index=69&type=chunk) - The acquisition complements SolarWinds' existing database management offerings and enhances support for Microsoft and Microsoft Azure environments[69](index=69&type=chunk)[71](index=71&type=chunk) - The transaction will be accounted for using the acquisition method, with results included in the fourth quarter of 2020 financial statements[72](index=72&type=chunk) [Intellectual Property Rights Transfer](index=19&type=section&id=Intellectual%20Property%20Rights%20Transfer) This section describes an intra-group transfer of intellectual property rights to an Irish subsidiary in November 2020, impacting future tax jurisdiction income mix - In November 2020, an intra-group transfer of certain intellectual property rights to an Irish subsidiary was completed, which will affect the mix of income by tax jurisdiction starting November 2020[73](index=73&type=chunk) - A discrete tax benefit may be recognized as a deferred tax asset during the fourth quarter of 2020, representing future amortization of the transferred IP rights in Ireland[73](index=73&type=chunk) - Two significant events occurred subsequent to September 30, 2020: the acquisition of SentryOne and an intra-group transfer of intellectual property rights[69](index=69&type=chunk)[73](index=73&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides a detailed discussion and analysis of SolarWinds Corporation's financial condition and results of operations, including an overview of the business, the impact of COVID-19, the potential spin-off of the MSP business, financial highlights, components of operations, period-over-period comparisons, non-GAAP financial measures, and liquidity and capital resources [Overview](index=20&type=section&id=Overview) This section introduces SolarWinds as a leading IT infrastructure management software provider, highlighting its product offerings, sales model, and public company status - SolarWinds is a leading provider of IT infrastructure management software, offering over **50 products** to monitor and manage various IT environments (network, systems, applications, databases, etc.) across on-premise, cloud, or hybrid models[75](index=75&type=chunk)[76](index=76&type=chunk) - The company utilizes a **"high-velocity, low-touch sales model"** to drive business growth and generate significant cash flow[75](index=75&type=chunk) - SolarWinds became a publicly traded company again in October 2018, following a take-private transaction in February 2016[77](index=77&type=chunk) [Impacts of COVID-19](index=20&type=section&id=Impacts%20of%20COVID-19) This section discusses the company's response to the COVID-19 pandemic, including remote work transition and the observed financial impact - The company transitioned nearly all its workforce to a remote working environment to prioritize personnel safety[78](index=78&type=chunk) - A small impact on financial results has been observed, and a significant longer-term impact on business, results of operations, and financial condition is not currently expected, though numerous uncertainties remain[78](index=78&type=chunk) - The company continues to evaluate the nature and extent of the COVID-19 pandemic's impact[78](index=78&type=chunk) [Potential Spin-Off of MSP Business](index=20&type=section&id=Potential%20Spin-Off%20of%20MSP%20Business_MD%26A) This section outlines the board's decision to explore spinning off the MSP business to enhance shareholder value and allow distinct strategic pursuits - On August 6, 2020, the board authorized management to explore a potential spin-off of its MSP business into a newly created and separately traded public company[79](index=79&type=chunk) - The potential spin-off aims to enable shareholders to more clearly evaluate the performance and future potential of each entity on a standalone basis, allowing each to pursue its own distinct business strategy[79](index=79&type=chunk) - The company incurred **$2.6 million** in spin-off exploration costs during the three months ended September 30, 2020, and expects to incur additional costs in future periods[80](index=80&type=chunk)[81](index=81&type=chunk) [Third Quarter Financial Highlights](index=21&type=section&id=Third%20Quarter%20Financial%20Highlights) This section summarizes the company's key financial performance indicators for the third quarter, including revenue growth, profitability, cash flow, and a recent acquisition [Revenue](index=21&type=section&id=Revenue_Third%20Quarter%20Financial%20Highlights) This section highlights the company's total revenue growth, the increasing proportion of recurring revenue, and key customer metrics for the third quarter - Total revenue for Q3 2020 was **$261.0 million**, an **8.5% increase** from **$240.5 million** in Q3 2019[83](index=83&type=chunk) - Recurring revenue (subscription and maintenance) represented approximately **85% of total revenue** in Q3 2020, up from **82%** in Q3 2019[83](index=83&type=chunk) - Subscription Annual Recurring Revenue (ARR) was **$411.1 million** as of September 30, 2020, up from **$343.1 million** in 2019, and Total ARR was **$887.2 million**, an **11.4% increase** from **$796.4 million**[86](index=86&type=chunk) - The company had over **320,000 customers** as of September 30, 2020, with **1,004 customers** spending more than **$100,000** in the trailing twelve-month period[87](index=87&type=chunk)[88](index=88&type=chunk) [Profitability](index=21&type=section&id=Profitability_Third%20Quarter%20Financial%20Highlights) This section presents the company's net income and Adjusted EBITDA for the third quarter, demonstrating significant year-over-year growth Profitability (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | | Net income | 12,502 | 4,393 | 184.6% | | Adjusted EBITDA | 132,651 | 115,030 | 15.3% | - Net income for the three months ended September 30, 2020, was **$12.5 million**, a significant increase from **$4.4 million** in the prior year[91](index=91&type=chunk) - Adjusted EBITDA for the three months ended September 30, 2020, was **$132.7 million**, up from **$115.0 million** in the prior year[91](index=91&type=chunk) [Cash Flow](index=23&type=section&id=Cash%20Flow_Third%20Quarter%20Financial%20Highlights) This section highlights the increase in operating cash flows and changes in interest and tax payments for the third quarter - Cash flows from operations for the three months ended September 30, 2020, were **$100.9 million**, an increase from **$75.2 million** in the same period of 2019[92](index=92&type=chunk) - Cash payments for interest on long-term debt decreased to **$14.6 million** in Q3 2020 from **$25.7 million** in Q3 2019[92](index=92&type=chunk) - Cash payments for income taxes increased to **$23.7 million** in Q3 2020 from **$9.2 million** in Q3 2019[92](index=92&type=chunk) [Acquisition](index=23&type=section&id=Acquisition_Third%20Quarter%20Financial%20Highlights) This section details the October 2020 acquisition of SentryOne for approximately $142.5 million, enhancing the company's database performance monitoring solutions - In October 2020, SolarWinds acquired SQL Sentry Holdings, LLC (SentryOne), a leading provider of database performance monitoring and DataOps solutions, for approximately **$142.5 million**, funded with cash on hand[93](index=93&type=chunk) - The SentryOne offering complements SolarWinds' existing database management solutions and enhances support for Microsoft and Microsoft Azure environments[93](index=93&type=chunk) - Total revenue increased by **8.5%** year-over-year to **$261.0 million** for the three months ended September 30, 2020[83](index=83&type=chunk) - Recurring revenue constituted approximately **85%** of total revenue in Q3 2020, up from **82%** in Q3 2019[83](index=83&type=chunk) - Net income significantly increased to **$12.5 million** in Q3 2020 from **$4.4 million** in Q3 2019, and Adjusted EBITDA rose to **$132.7 million** from **$115.0 million**[91](index=91&type=chunk) - Cash flows from operations were **$100.9 million** in Q3 2020, up from **$75.2 million** in Q3 2019[92](index=92&type=chunk) - In October 2020, the company acquired SentryOne for approximately **$142.5 million**, enhancing its database performance monitoring and DataOps solutions[93](index=93&type=chunk) [Components of Our Results of Operations](index=23&type=section&id=Components%20of%20Our%20Results%20of%20Operations) This section breaks down the key elements contributing to the company's financial performance, including revenue streams, cost of revenue, operating expenses, and other income/expense items [Revenue](index=23&type=section&id=Revenue_Components%20of%20Our%20Results%20of%20Operations) This section defines the company's revenue sources, distinguishing between recurring (subscription and maintenance) and license revenue, and notes the introduction of subscription pricing options - **Recurring Revenue**: Derived from SaaS offerings and time-based license arrangements (subscription revenue), and maintenance services for perpetual license products[95](index=95&type=chunk) - Subscription revenue grows as customers add new products, upgrade capacity, or increase usage, particularly for MSP products[95](index=95&type=chunk) - **License Revenue**: Generated from sales of perpetual licenses for on-premise products, recognized upon delivery of the electronic license key[95](index=95&type=chunk) - In April 2020, subscription pricing options were introduced for certain network, systems, and database management products, potentially impacting the mix of license and recurring revenue[95](index=95&type=chunk) [Cost of Revenue](index=24&type=section&id=Cost%20of%20Revenue_Components%20of%20Our%20Results%20of%20Operations) This section outlines the components of cost of revenue, including technical support, hosting fees, and amortization of acquired technologies - Cost of recurring revenue includes technical support personnel costs, royalty fees, public cloud infrastructure and hosting fees, and allocated overhead for subscription and maintenance services[99](index=99&type=chunk) - Amortization of acquired technologies, stemming from the Take Private and other acquisitions, is also included in the cost of revenue[99](index=99&type=chunk) [Operating Expenses](index=24&type=section&id=Operating%20Expenses_Components%20of%20Our%20Results%20of%20Operations) This section details the primary components of operating expenses, emphasizing personnel costs, employee growth, and the impact of stock-based compensation and COVID-19 on travel - Personnel costs, including salaries, benefits, bonuses, sales commissions, and stock-based compensation, are the most significant component of operating expenses[96](index=96&type=chunk) - Total employees increased to **3,241** as of September 30, 2020, from **3,121** as of September 30, 2019[96](index=96&type=chunk) - Stock-based compensation expense increased due to equity awards and modifications to eliminate performance vesting conditions, while travel costs declined due to COVID-19[96](index=96&type=chunk) - Operating expenses are categorized into Sales and Marketing, Research and Development, General and Administrative, and Amortization of Acquired Intangibles[100](index=100&type=chunk) [Other Income (Expense)](index=24&type=section&id=Other%20Income%20(Expense)_Components%20of%20Our%20Results%20of%20Operations) This section explains that other income (expense) primarily consists of interest expense and foreign currency gains or losses, with interest expense expected to decrease over time - This category primarily consists of interest expense and gains or losses resulting from changes in foreign currency exchange rates[97](index=97&type=chunk) - Interest expense is expected to decrease as the company repays its indebtedness[97](index=97&type=chunk) [Foreign Currency](index=24&type=section&id=Foreign%20Currency_Components%20of%20Our%20Results%20of%20Operations) This section addresses the company's exposure to foreign currency exchange rate fluctuations, which impact financial results, with key exposures identified in Euro, British Pound Sterling, and Australian Dollar - As a global company, SolarWinds is exposed to adverse movements in foreign currency exchange rates, which impact total assets, liabilities, revenue, operating expenses, and cash flows of its foreign subsidiaries[98](index=98&type=chunk) - Fluctuations in the **Euro, British Pound Sterling,** and **Australian Dollar** against the United States Dollar are key exposures[98](index=98&type=chunk) [Income Tax Expense](index=24&type=section&id=Income%20Tax%20Expense_Components%20of%20Our%20Results%20of%20Operations) This section explains that income tax expense comprises domestic and foreign corporate income taxes, noting that international income growth may lead to a declining effective tax rate - Income tax expense consists of domestic and foreign corporate income taxes related to product sales[99](index=99&type=chunk) - The tax rate on income earned by North American entities is higher than that on international entities[99](index=99&type=chunk) - The company expects international income to grow as a percentage of total income, which may lead to a decline in its effective income tax rate over time[99](index=99&type=chunk) - Revenue primarily consists of recurring revenue (subscription and maintenance) and perpetual license revenue[94](index=94&type=chunk) - Operating expenses, with personnel costs as the most significant component, include sales and marketing, research and development, general and administrative, and amortization of acquired intangibles[96](index=96&type=chunk)[100](index=100&type=chunk) - Other income (expense) mainly comprises interest expense and foreign currency gains/losses, while income tax expense is influenced by domestic and foreign corporate income taxes[97](index=97&type=chunk)[99](index=99&type=chunk) [Comparison of the Three Months Ended September 30, 2020 and 2019](index=25&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20September%2030,%202020%20and%202019) This section provides a detailed comparative analysis of the company's financial performance for the third quarter of 2020 versus 2019, covering revenue, costs, and profitability [Revenue](index=25&type=section&id=Revenue_Q3%20Comparison) This section analyzes the changes in subscription, maintenance, and license revenue for the third quarter, highlighting growth drivers and impacts of economic conditions Revenue (in thousands) | Revenue Type (in thousands) | Q3 2020 | Q3 2019 | Change | % of Revenue (Q3 2020) | % of Revenue (Q3 2019) | | :-------------------------- | :------ | :------ | :----- | :--------------------- | :--------------------- | | Subscription | 100,564 | 83,122 | 21.0% | 38.5% | 34.6% | | Maintenance | 121,134 | 113,755 | 6.5% | 46.4% | 47.3% | | Total recurring revenue | 221,698 | 196,877 | 12.6% | 84.9% | 81.9% | | License | 39,284 | 43,613 | -9.9% | 15.1% | 18.1% | | Total revenue | 260,982 | 240,490 | 8.5% | 100.0% | 100.0% | - Total revenue increased by **$20.5 million**, or **8.5%**, for the three months ended September 30, 2020, compared to the same period in 2019[101](index=101&type=chunk) - Core IT Management product revenue increased by **6.6%** to **$184.8 million**, and MSP product revenue increased by **13.4%** to **$76.2 million**[101](index=101&type=chunk) [Recurring Revenue](index=25&type=section&id=Recurring%20Revenue_Q3%20Comparison) This section details the growth in subscription and maintenance revenue, driven by MSP product sales, cloud offerings, and strong customer retention - Subscription revenue increased by **$17.4 million (21.0%)** due to additional MSP product sales, cloud-based database management offerings, and foreign currency strengthening[102](index=102&type=chunk) - The net retention rate for subscription products was approximately **105%** for both trailing twelve-month periods ended September 30, 2020 and 2019, driven by strong customer retention and expansion in MSP products[103](index=103&type=chunk) - Maintenance revenue increased by **$7.4 million (6.5%)** due to a growing customer base, strong renewal rates, and annual price increases[104](index=104&type=chunk) - The maintenance renewal rate for perpetual license products decreased to approximately **92%** in 2020 from **95%** in 2019, primarily due to a planned downgrade on a large U.S. Federal maintenance renewal[105](index=105&type=chunk) [License Revenue](index=25&type=section&id=License%20Revenue_Q3%20Comparison) This section explains the decrease in license revenue, attributing it to the challenging economic environment caused by COVID-19 and a shift towards subscription sales - License revenue decreased by **$4.3 million**, or **9.9%**, primarily due to the difficult economic environment caused by COVID-19 and an increase in subscription sales of historically perpetual license products[106](index=106&type=chunk) [Cost of Revenue](index=26&type=section&id=Cost%20of%20Revenue_Q3%20Comparison) This section analyzes the increase in total cost of revenue, driven by higher public cloud infrastructure fees, depreciation, and personnel costs Cost of Revenue (in thousands) | Cost of Revenue (in thousands) | Q3 2020 | Q3 2019 | Change | % of Revenue (Q3 2020) | % of Revenue (Q3 2019) | | :----------------------------- | :------ | :------ | :----- | :--------------------- | :--------------------- | | Cost of recurring revenue | 23,484 | 20,614 | 13.9% | 9.0% | 8.6% | | Amortization of acquired technologies | 45,463 | 44,172 | 2.9% | 17.4% | 18.4% | | Total cost of revenue | 68,947 | 64,786 | 6.4% | 26.4% | 26.9% | - Total cost of revenue increased by **$4.2 million**, or **6.4%**, primarily due to increases in public cloud infrastructure and hosting fees (**$1.7 million**), depreciation and other amortization (**$0.9 million**), and personnel costs (**$0.5 million**, including **$0.4 million** in stock-based compensation)[107](index=107&type=chunk) - Amortization of acquired technologies included **$41.4 million** related to the Take Private for the three months ended September 30, 2020[107](index=107&type=chunk) [Operating Expenses](index=26&type=section&id=Operating%20Expenses_Q3%20Comparison) This section analyzes the increase in total operating expenses, particularly in general and administrative costs due to personnel and spin-off exploration, and sales and marketing Operating Expenses (in thousands) | Operating Expense (in thousands) | Q3 2020 | Q3 2019 | Change | % of Revenue (Q3 2020) | % of Revenue (Q3 2019) | | :------------------------------- | :------ | :------ | :----- | :--------------------- | :--------------------- | | Sales and marketing | 73,460 | 68,290 | 7.6% | 28.1% | 28.4% | | Research and development | 31,288 | 29,575 | 5.8% | 12.0% | 12.3% | | General and administrative | 33,558 | 25,405 | 32.1% | 12.9% | 10.6% | | Amortization of acquired intangibles | 18,624 | 18,015 | 3.4% | 7.1% | 7.5% | | Total operating expenses | 156,930 | 141,285 | 11.1% | 60.1% | 58.7% | - Total operating expenses increased by **$15.6 million**, or **11.1%**, to **$156.9 million**[108](index=108&type=chunk) - General and administrative expenses saw the largest percentage increase (**32.1%**), driven by personnel costs (**$7.0 million**, including **$6.6 million** stock-based compensation) and **$2.5 million** in spin-off exploration costs[110](index=110&type=chunk) - Sales and marketing expenses increased by **$5.2 million (7.6%)**, mainly due to personnel costs (**$6.6 million**, including **$4.0 million** stock-based compensation), partially offset by reduced travel[108](index=108&type=chunk) [Interest Expense, Net](index=26&type=section&id=Interest%20Expense,%20Net_Q3%20Comparison) This section details the decrease in net interest expense, primarily due to lower interest rates and a reduction in the outstanding debt balance Interest Expense, Net (in thousands, except percentages) | Metric (in thousands, except percentages) | Q3 2020 | Q3 2019 | Change | % of Revenue (Q3 2020) | % of Revenue (Q3 2019) | | :-------------------------------- | :------ | :------ | :----- | :--------------------- | :--------------------- | | Interest expense, net | (16,792) | (27,418) | 38.8% | -6.4% | -11.4% | - Interest expense, net, decreased by **$10.6 million**, or **38.8%**, primarily due to decreases in interest rates on debt and a reduction in the outstanding debt balance[113](index=113&type=chunk) - The weighted-average effective interest rate on debt decreased to **2.95%** in Q3 2020 from **5.00%** in Q3 2019[113](index=113&type=chunk) [Other Income (Expense), Net](index=27&type=section&id=Other%20Income%20(Expense),%20Net_Q3%20Comparison) This section reports a decrease in other income (expense), net, primarily due to the impact of foreign currency exchange rate changes Other Income (Expense), Net (in thousands) | Metric (in thousands) | Q3 2020 | Q3 2019 | Change | % of Revenue (Q3 2020) | % of Revenue (Q3 2019) | | :-------------------- | :------ | :------ | :----- | :--------------------- | :--------------------- | | Other income (expense), net | (547) | 287 | -290.6% | -0.2% | 0.1% | - Other income (expense), net, decreased by **$0.8 million**, primarily due to the impact of changes in foreign currency exchange rates[114](index=114&type=chunk) [Income Tax Expense](index=27&type=section&id=Income%20Tax%20Expense_Q3%20Comparison) This section analyzes the increase in income tax expense and the decrease in the effective tax rate, driven by higher income before taxes and a valuation allowance Income Tax Expense (in thousands, except rates) | Metric (in thousands, except rates) | Q3 2020 | Q3 2019 | Change | | :-------------------------------- | :------ | :------ | :----- | | Income before income taxes | 17,766 | 7,288 | 143.8% | | Income tax expense | 5,264 | 2,895 | 81.8% | | Effective tax rate | 29.6% | 39.7% | -10.1% | - Income tax expense increased by **$2.4 million**, while the effective tax rate decreased to **29.6%** from **39.7%**[115](index=115&type=chunk) - The decrease in effective tax rate was primarily due to an increase in income before income taxes and the impact of a full valuation allowance against deferred tax assets related to the Samanage acquisition[115](index=115&type=chunk) - Total revenue increased by **$20.5 million (8.5%)** to **$261.0 million**, driven by growth in recurring revenue[101](index=101&type=chunk) - Net income increased significantly by **$8.1 million (184.6%)** to **$12.5 million**[18](index=18&type=chunk) - Interest expense, net, decreased by **$10.6 million (38.8%)** due to lower interest rates and reduced outstanding debt[113](index=113&type=chunk) - Income tax expense increased by **$2.4 million**, but the effective tax rate decreased to **29.6%** from **39.7%**[115](index=115&type=chunk) [Comparison of the Nine Months Ended September 30, 2020 and 2019](index=27&type=section&id=Comparison%20of%20the%20Nine%20Months%20Ended%20September%2030,%202020%20and%202019) This section provides a detailed comparative analysis of the company's financial performance for the nine months ended September 30, 2020, versus 2019, covering revenue, costs, and profitability [Revenue](index=27&type=section&id=Revenue_9M%20Comparison) This section analyzes the changes in subscription, maintenance, and license revenue for the nine-month period, highlighting growth drivers and impacts of economic conditions Revenue (in thousands) | Revenue Type (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | % of Revenue (2020) | % of Revenue (2019) | | :-------------------------- | :-------------------------- | :-------------------------- | :----- | :------------------ | :------------------ | | Subscription | 290,039 | 233,467 | 24.2% | 38.5% | 34.1% | | Maintenance | 353,981 | 330,840 | 7.0% | 47.0% | 48.3% | | Total recurring revenue | 644,020 | 564,307 | 14.1% | 85.4% | 82.4% | | License | 109,927 | 120,723 | -8.9% | 14.6% | 17.6% | | Total revenue | 753,947 | 685,030 | 10.1% | 100.0% | 100.0% | - Total revenue increased by **$68.9 million**, or **10.1%**, for the nine months ended September 30, 2020, compared to the same period in 2019[116](index=116&type=chunk) - Core IT Management product revenue increased by **8.2%** to **$531.2 million**, and MSP product revenue increased by **14.8%** to **$222.7 million**[116](index=116&type=chunk)[117](index=117&type=chunk) [Recurring Revenue](index=29&type=section&id=Recurring%20Revenue_9M%20Comparison) This section details the growth in subscription and maintenance revenue for the nine-month period, driven by MSP product sales, acquisitions, and strong customer retention - Subscription revenue increased by **$56.6 million (24.2%)** due to additional MSP product sales and contributions from acquired products (SolarWinds Service Desk and Database Performance Monitor)[118](index=118&type=chunk) - The net retention rate for subscription products was approximately **105%** for both trailing twelve-month periods ended September 30, 2020 and 2019, driven by strong customer retention and expansion in MSP products[119](index=119&type=chunk) - Maintenance revenue increased by **$23.1 million (7.0%)** due to a growing customer base, strong renewal rates, and annual price increases[120](index=120&type=chunk) - The maintenance renewal rate for perpetual license products decreased to approximately **92%** in 2020 from **95%** in 2019, mainly due to a planned downgrade on a large U.S. Federal maintenance renewal[121](index=121&type=chunk) [License Revenue](index=29&type=section&id=License%20Revenue_9M%20Comparison) This section explains the decrease in license revenue for the nine-month period, primarily due to the economic impact of COVID-19 and foreign currency weakening - License revenue decreased by **$10.8 million**, or **8.9%**, primarily due to the difficult economic environment caused by COVID-19 in the second and third quarters of 2020 and the weakening of most foreign currencies relative to the U.S. dollar[122](index=122&type=chunk) [Cost of Revenue](index=29&type=section&id=Cost%20of%20Revenue_9M%20Comparison) This section analyzes the increase in total cost of revenue for the nine-month period, driven by higher public cloud infrastructure fees, personnel costs, and amortization from acquisitions Cost of Revenue (in thousands) | Cost of Revenue (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | % of Revenue (2020) | % of Revenue (2019) | | :----------------------------- | :-------------------------- | :-------------------------- | :----- | :------------------ | :------------------ | | Cost of recurring revenue | 67,807 | 58,159 | 16.6% | 9.0% | 8.5% | | Amortization of acquired technologies | 134,789 | 131,961 | 2.1% | 17.9% | 19.3% | | Total cost of revenue | 202,596 | 190,120 | 6.6% | 26.9% | 27.8% | - Total cost of revenue increased by **$12.5 million**, or **6.6%**, primarily due to increases in public cloud infrastructure and hosting fees (**$4.8 million**), personnel costs (**$2.9 million**, including **$0.6 million** stock-based compensation), and depreciation and other amortization (**$2.4 million**)[123](index=123&type=chunk) - The increase in amortization of acquired technologies is primarily related to intangibles acquired through the Samanage and VividCortex acquisitions in 2019[123](index=123&type=chunk) [Operating Expenses](index=30&type=section&id=Operating%20Expenses_9M%20Comparison) This section analyzes the increase in total operating expenses for the nine-month period, particularly in general and administrative costs due to personnel, spin-off exploration, and sales and marketing Operating Expenses (in thousands) | Operating Expense (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | % of Revenue (2020) | % of Revenue (2019) | | :------------------------------- | :-------------------------- | :-------------------------- | :----- | :------------------ | :------------------ | | Sales and marketing | 216,550 | 193,698 | 11.8% | 28.7% | 28.3% | | Research and development | 93,878 | 82,468 | 13.8% | 12.5% | 12.0% | | General and administrative | 87,780 | 72,382 | 21.3% | 11.6% | 10.6% | | Amortization of acquired intangibles | 55,214 | 51,818 | 6.6% | 7.3% | 7.6% | | Total operating expenses | 453,422 | 400,366 | 13.2% | 60.1% | 58.4% | - Total operating expenses increased by **$53.1 million**, or **13.2%**, to **$453.4 million**[124](index=124&type=chunk) - General and administrative expenses increased by **$15.4 million (21.3%)**, driven by personnel costs (**$14.2 million**, including **$9.5 million** stock-based compensation), **$2.5 million** in spin-off exploration costs, and increased provision for credit losses[126](index=126&type=chunk) - Sales and marketing expenses increased by **$22.9 million (11.8%)**, primarily due to personnel costs (**$19.7 million**, including **$6.8 million** stock-based compensation) and marketing program costs[124](index=124&type=chunk) [Interest Expense, Net](index=30&type=section&id=Interest%20Expense,%20Net_9M%20Comparison) This section details the decrease in net interest expense for the nine-month period, primarily due to lower interest rates and a reduction in the outstanding debt balance Interest Expense, Net (in thousands, except percentages) | Metric (in thousands, except percentages) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | % of Revenue (2020) | % of Revenue (2019) | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :------------------ | :------------------ | | Interest expense, net | (59,200) | (82,977) | 28.7% | -7.9% | -12.1% | - Interest expense, net, decreased by **$23.8 million**, or **28.7%**, primarily due to decreases in interest rates on debt and a reduction in the outstanding debt balance[128](index=128&type=chunk) - The weighted-average effective interest rate on debt decreased to **3.53%** in the nine months ended September 30, 2020, from **5.15%** in 2019[128](index=128&type=chunk) [Other Income (Expense), Net](index=31&type=section&id=Other%20Income%20(Expense),%20Net_9M%20Comparison) This section reports a decrease in other income (expense), net, for the nine-month period, primarily due to the impact of foreign currency exchange rate changes Other Income (Expense), Net (in thousands) | Metric (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | % of Revenue (2020) | % of Revenue (2019) | | :-------------------- | :-------------------------- | :-------------------------- | :----- | :------------------ | :------------------ | | Other income (expense), net | (942) | 506 | -286.6% | -0.1% | 0.1% | - Other income (expense), net, decreased by **$1.4 million**, primarily due to the impact of changes in foreign currency exchange rates[129](index=129&type=chunk) [Income Tax Expense](index=31&type=section&id=Income%20Tax%20Expense_9M%20Comparison) This section analyzes the increase in income tax expense and the decrease in the effective tax rate for the nine-month period, driven by higher income before taxes and a valuation allowance Income Tax Expense (in thousands, except rates) | Metric (in thousands, except rates) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | | Income before income taxes | 37,787 | 12,073 | 212.9% | | Income tax expense | 12,025 | 6,654 | 80.7% | | Effective tax rate | 31.8% | 55.1% | -23.3% | - Income tax expense increased by **$5.4 million**, while the effective tax rate decreased to **31.8%** from **55.1%**[130](index=130&type=chunk) - The decrease in effective tax rate was primarily due to an increase in income before income taxes and the impact of a full valuation allowance against deferred tax assets related to the Samanage acquisition[130](index=130&type=chunk) - Total revenue increased by **$68.9 million (10.1%)** to **$753.9 million**, driven by strong recurring revenue growth[116](index=116&type=chunk) - Net income increased significantly by **$20.3 million (375.4%)** to **$25.8 million**[18](index=18&type=chunk) - Interest expense, net, decreased by **$23.8 million (28.7%)** due to lower interest rates and reduced outstanding debt[128](index=128&type=chunk) - Income tax expense increased by **$5.4 million**, but the effective tax rate decreased to **31.8%** from **55.1%**[130](index=130&type=chunk) [Non-GAAP Financial Measures](index=31&type=section&id=Non-GAAP%20Financial%20Measures) This section presents non-GAAP financial measures, including revenue, operating income, and Adjusted EBITDA, to provide a clearer view of core operational performance [Non-GAAP Revenue](index=32&type=section&id=Non-GAAP%20Revenue) This section presents non-GAAP revenue, which excludes purchase accounting impacts from acquisitions, to offer a more comparable view of revenue growth - Non-GAAP revenue excludes the impact of purchase accounting from acquisitions to provide a better assessment of revenue growth rates and comparability between periods[133](index=133&type=chunk) Non-GAAP Revenue (in thousands) | Revenue Type (in thousands) | 3 Months Ended Sep 30, 2020 (Non-GAAP) | 3 Months Ended Sep 30, 2019 (Non-GAAP) | 9 Months Ended Sep 30, 2020 (Non-GAAP) | 9 Months Ended Sep 30, 2019 (Non-GAAP) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Subscription | 100,857 | 85,337 | 292,405 | 237,501 | | Maintenance | 121,134 | 113,755 | 353,981 | 330,840 | | Total recurring revenue | 221,991 | 199,092 | 646,386 | 568,341 | | License | 39,284 | 43,613 | 109,927 | 120,723 | | Total non-GAAP revenue | 261,275 | 242,705 | 756,313 | 689,064 | [Non-GAAP Operating Income and Non-GAAP Operating Margin](index=32&type=section&id=Non-GAAP%20Operating%20Income%20and%20Non-GAAP%20Operating%20Margin) This section presents non-GAAP operating income and margin, excluding specific non-core items to provide a clearer view of operational profitability - Non-GAAP operating income excludes the impact of purchase accounting, amortization of acquired intangible assets, stock-based compensation, acquisition and other costs, spin-off exploration costs, and restructuring costs[135](index=135&type=chunk)[136](index=136&type=chunk)[137](index=137&type=chunk)[139](index=139&type=chunk) Non-GAAP Operating Income and Non-GAAP Operating Margin (in thousands, except margin data) | Metric (in thousands, except margin data) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | GAAP operating income | 35,105 | 34,419 | 97,929 | 94,544 | | Non-GAAP operating income | 127,315 | 110,996 | 345,797 | 317,943 | | GAAP operating margin | 13.5% | 14.3% | 13.0% | 13.8% | | Non-GAAP operating margin | 48.7% | 45.7% | 45.7% | 46.1% | [Adjusted EBITDA and Adjusted EBITDA Margin](index=33&type=section&id=Adjusted%20EBITDA%20and%20Adjusted%20EBIT

Q3'20 Results October 27, 2020 © 2020 SolarWinds Worldwide, LLC. All rights reserved. General Disclaimer Forward-Looking Statements 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, the impact of the COVID-19 pandemic and related global economic environment on our business, the potential spin-off of our MSP ...

Financial Data and Key Metrics Changes - Total non-GAAP revenue for Q3 2020 was approximately $261 million, reflecting an 8% year-over-year growth and exceeding the high end of the outlook [9][27] - Adjusted EBITDA for Q3 2020 was approximately $133 million, resulting in a 51% adjusted EBITDA margin, the highest level in the last 11 quarters [9][24] - Total cash balance reached $425 million as of September 30, 2020, an increase of over $250 million from December 31, 2019 [23] Business Line Data and Key Metrics Changes - Total ARR reached approximately $887 million as of September 30, 2020, reflecting year-over-year growth of 11%, with subscription ARR growing at a faster rate of 20% [13][14] - Non-GAAP license and maintenance revenue grew by 2% year-over-year, reaching $160.4 million, driven by a 7% increase in maintenance revenue [28] - Subscription revenue for Q3 was $101 million, growing 18% year-over-year, with 85% of total revenue being recurring [31] Market Data and Key Metrics Changes - The most significant improvement in performance was observed in the EMEA region, followed by North America [11] - The MSP business is expected to generate slightly over $300 million of non-GAAP revenue in 2020, with a growth rate of 12% in Q3 [36][37] Company Strategy and Development Direction - The company is focusing on expanding its database management capabilities, driven by digital transformation and hybrid cloud infrastructures [15][16] - The planned acquisition of SentryOne for approximately $142 million aims to enhance the company's database performance monitoring capabilities [19][20] - The company is exploring a potential spin-off of its MSP business into a separately traded public company, expected to receive final approval in the first half of 2021 [52][54] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to deliver continued growth despite the challenging economic environment, with signs of improvement in customer spending and new customer acquisitions [47][80] - The company anticipates a stable economic environment in Q4 2020, with expectations for improved growth in 2021 [67][50] Other Important Information - The company reported a maintenance renewal rate of 92% and a subscription net retention rate stable at 105% [14][45] - The CEO search is ongoing, with a focus on finding a leader for the core IT management business [55][56] Q&A Session Summary Question: Comments on license trajectory improvement - Management noted a solid quarter for license revenue, with a significant majority of licensed products now offered under a subscription basis [64] Question: Insights on the MSP business and competition with Datto - Management acknowledged Datto's successful IPO and highlighted the differences in their offerings, emphasizing strengths in remote monitoring and management [70][72] Question: Details on customer expansion and churn in the MSP business - Management reported an increase in new customer acquisitions and stable device counts among small MSPs, indicating signs of recovery [83][84] Question: Growth factors for the MSP business post-spin-off - Management indicated that increased investment in R&D and customer success initiatives would drive growth, alongside the introduction of new offerings [86] Question: Thoughts on the SentryOne acquisition - Management highlighted the complementary nature of SentryOne's offerings, particularly in the Microsoft environment, enhancing their database management capabilities [99][100]

[PART I - FINANCIAL INFORMATION](index=6&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=6&type=section&id=Item%201.%20Financial%20Statements) Presents unaudited condensed consolidated financial statements, highlighting revenue growth, increased net income, and a potential MSP spin-off Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--- | :--- | :--- | | **Total Assets** | **$5,349,209** | **$5,310,742** | | Cash and cash equivalents | $331,414 | $173,372 | | Goodwill | $4,058,287 | $4,058,198 | | **Total Liabilities** | **$2,663,497** | **$2,661,220** | | Total debt | $1,907,926 | $1,913,306 | | Deferred revenue (Current) | $314,105 | $312,227 | | **Total Stockholders' Equity** | **$2,685,712** | **$2,649,522** | Condensed Consolidated Statements of Operations Highlights (in thousands) | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | Six Months 2020 (in thousands) | Six Months 2019 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | **$246,015** | **$228,748** | **$492,965** | **$444,540** | | Total recurring revenue | $212,338 | $189,573 | $422,322 | $367,430 | | License revenue | $33,677 | $39,175 | $70,643 | $77,110 | | **Operating Income** | **$35,141** | **$30,330** | **$62,824** | **$60,125** | | **Net Income (Loss)** | **$12,845** | **($2,119)** | **$13,260** | **$1,026** | | Diluted EPS | $0.04 | ($0.01) | $0.04 | $0.00 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $184,090 | $141,652 | | Net cash used in investing activities | ($16,305) | ($359,096) | | Net cash used in financing activities | ($9,660) | ($9,834) | | **Net increase (decrease) in cash** | **$158,042** | **($227,330)** | - On August 6, 2020, the board authorized exploring a potential **tax-free, pro-rata spin-off of the MSP business** into a new public company, subject to final approval[76](index=76&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q2 and H1 2020 financial results, highlighting revenue growth, recurring revenue trends, minimal COVID-19 impact, and the potential MSP spin-off [Overview and Key Developments](index=27&type=section&id=Overview%20and%20Key%20Developments) SolarWinds, an IT infrastructure software provider, reports minimal COVID-19 financial impact and is exploring a potential spin-off of its MSP business - The company is exploring a potential **tax-free, pro-rata spin-off of its MSP business** into a new public company[83](index=83&type=chunk) - Management reports a **minimal financial impact from COVID-19** to date, but acknowledges future uncertainty[82](index=82&type=chunk) Annual Recurring Revenue (ARR) as of June 30, 2020 (in millions) | Metric | June 30, 2020 (in millions) | June 30, 2019 (in millions) | | :--- | :--- | :--- | | Subscription ARR | $393.6 | $337.3 | | Total ARR | $872.5 | $789.8 | [Results of Operations - Three Months Ended June 30, 2020 vs. 2019](index=31&type=section&id=Results%20of%20Operations%20-%20Three%20Months%20Ended%20June%2030%2C%202020%20vs.%202019) Q2 2020 saw **7.5% total revenue growth** to **$246.0 million**, driven by recurring revenue, with net income reaching **$12.8 million** due to lower interest expense Revenue Breakdown (Q2 2020 vs Q2 2019, in thousands) | Revenue Type | Q2 2020 (in thousands) | Q2 2019 (in thousands) | Change ($ in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Subscription | $95,840 | $78,780 | $17,060 | 21.7% | | Maintenance | $116,498 | $110,793 | $5,705 | 5.1% | | **Total Recurring** | **$212,338** | **$189,573** | **$22,765** | **12.0%** | | License | $33,677 | $39,175 | ($5,498) | (14.0%) | | **Total Revenue** | **$246,015** | **$228,748** | **$17,267** | **7.5%** | - Subscription product net retention rate was approximately **105%**, while maintenance renewal rate for perpetual license products was approximately **92%**, down from **97%**[109](index=109&type=chunk)[111](index=111&type=chunk) - Interest expense decreased by **35.0%** to **$18.3 million**, driven by lower weighted-average interest rates on debt (**3.26%** in Q2 2020 vs. **5.21%** in Q2 2019)[119](index=119&type=chunk) [Results of Operations - Six Months Ended June 30, 2020 vs. 2019](index=37&type=section&id=Results%20of%20Operations%20-%20Six%20Months%20Ended%20June%2030%2C%202020%20vs.%202019) H1 2020 total revenue grew **10.9%** to **$493.0 million**, driven by recurring revenue, with net income significantly increasing to **$13.3 million** Revenue Breakdown (Six Months 2020 vs 2019, in thousands) | Revenue Type | Six Months 2020 (in thousands) | Six Months 2019 (in thousands) | Change ($ in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Subscription | $189,475 | $150,345 | $39,130 | 26.0% | | Maintenance | $232,847 | $217,085 | $15,762 | 7.3% | | **Total Recurring** | **$422,322** | **$367,430** | **$54,892** | **14.9%** | | License | $70,643 | $77,110 | ($6,467) | (8.4%) | | **Total Revenue** | **$492,965** | **$444,540** | **$48,425** | **10.9%** | - Sales and marketing expenses increased by **14.1%** to **$143.1 million**, primarily due to higher personnel and marketing program costs[133](index=133&type=chunk) - General and administrative expenses increased **15.4%** to **$54.2 million**, driven by higher personnel costs and increased provision for accounts receivable losses due to COVID-19 uncertainty[136](index=136&type=chunk) [Non-GAAP Financial Measures](index=43&type=section&id=Non-GAAP%20Financial%20Measures) The company uses non-GAAP measures like Adjusted EBITDA, which reached **$119.1 million** (48.3% margin) in Q2 2020, to show underlying profitability Reconciliation of GAAP Net Income to Adjusted EBITDA (in thousands) | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | Six Months 2020 (in thousands) | Six Months 2019 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | **Net income (loss)** | **$12,845** | **($2,119)** | **$13,260** | **$1,026** | | Amortization and depreciation | $68,247 | $65,577 | $136,015 | $130,040 | | Income tax expense | $4,346 | $3,194 | $6,761 | $3,759 | | Interest expense, net | $18,313 | $28,177 | $42,408 | $55,559 | | Stock-based compensation | $13,152 | $7,540 | $24,635 | $15,258 | | Other adjustments | $2,186 | $8,393 | $7,030 | $10,028 | | **Adjusted EBITDA** | **$119,079** | **$110,862** | **$230,009** | **$215,710** | | **Adjusted EBITDA Margin** | **48.3%** | **48.1%** | **46.5%** | **48.3%** | [Liquidity and Capital Resources](index=46&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2020, the company held **$331.4 million** in cash, driven by strong operating cash flow, with total debt at **$1.9 billion**, deemed sufficient for future operations Summary of Cash Flows (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $184,090 | $141,652 | | Net cash used in investing activities | ($16,305) | ($359,096) | | Net cash used in financing activities | ($9,660) | ($9,834) | | **Net increase (decrease) in cash** | **$158,042** | **($227,330)** | - Total indebtedness was **$1.9 billion** as of June 30, 2020, with **$125.0 million** available under the revolving credit facility[157](index=157&type=chunk) - Operating cash flow increased due to higher net income, while investing cash flow decreased significantly due to the prior year's **$349.5 million** Samanage acquisition[164](index=164&type=chunk)[167](index=167&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=51&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company faces market risks from variable-rate debt interest rate fluctuations and foreign currency exchange rate movements, with a **100 basis point interest rate increase** potentially raising annual interest expense by **$19.5 million** - With **$1.9 billion** in variable-rate debt, a **100 basis point increase** in interest rates would raise annual interest expense by approximately **$19.5 million**[177](index=177&type=chunk) - SolarWinds faces foreign currency exchange risk from international operations, primarily with the **Euro, British Pound Sterling, and Australian Dollar** against the USD[179](index=179&type=chunk) [Item 4. Controls and Procedures](index=52&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls were **effective** as of June 30, 2020, with **no material changes** to internal control over financial reporting[187](index=187&type=chunk)[188](index=188&type=chunk) [PART II - OTHER INFORMATION](index=53&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=53&type=section&id=Item%201.%20Legal%20Proceedings) The company is not a party to any material legal proceedings and does not expect pending claims to have a significant adverse impact - SolarWinds is **not involved in any material legal proceedings** expected to have a significant adverse financial impact[190](index=190&type=chunk) [Item 1A. Risk Factors](index=53&type=section&id=Item%201A.%20Risk%20Factors) Updates risk factors, emphasizing potential disruptions from the MSP business spin-off and ongoing uncertainties related to the COVID-19 pandemic's impact - A new risk factor highlights the potential **disruptive and costly MSP business spin-off**, which may not achieve intended benefits or could impact relationships and retention[192](index=192&type=chunk)[193](index=193&type=chunk)[195](index=195&type=chunk) - Ongoing **COVID-19 pandemic risks** include uncertain duration, potential impact on customer IT spending, and operational disruptions, which could adversely affect financial results[196](index=196&type=chunk)[201](index=201&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=55&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports equity security repurchases during the quarter, primarily related to buying back unvested employee-held restricted stock upon employment termination Issuer Purchases of Equity Securities (Q2 2020) | Period | Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 1-30, 2020 | — | $— | | May 1-31, 2020 | 5,600 | $0.27 | | June 1-30, 2020 | 3,200 | $0.27 | | **Total** | **8,800** | | [Item 5. Other Information](index=55&type=section&id=Item%205.%20Other%20Information) CEO Kevin B. Thompson's employment and equity agreements were amended, linking termination to the MSP divestiture and modifying equity vesting, and William Bock was appointed Board Chairman - CEO Kevin B. Thompson's employment agreement was amended, linking his termination to the earlier of an **MSP business divestiture** or a **new CEO appointment**[200](index=200&type=chunk) - Certain of the CEO's outstanding equity awards were amended to **eliminate performance-based vesting**, reduce shares, and provide for accelerated vesting[208](index=208&type=chunk) - **William Bock** was appointed as the new **chairman of the Board of Directors**, effective August 5, 2020[204](index=204&type=chunk) [Item 6. Exhibits](index=57&type=section&id=Item%206.%20Exhibits) This section indexes exhibits filed with the Form 10-Q, including corporate documents, the CEO's amended employment agreements, and Sarbanes-Oxley Act certifications