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

Financial Data and Key Metrics Changes - Total non-GAAP revenue for Q2 2020 reached approximately $248 million on a constant currency basis, reflecting a 7% year-over-year growth on a reported basis and 8% growth on a constant currency basis [13][14] - Adjusted EBITDA for Q2 2020 was over $119 million, exceeding the high end of the outlook, with an adjusted EBITDA margin of 48% and year-over-year growth of 7% [14][45] - Cash on hand at the end of Q2 2020 was $331 million, an increase of $94 million since March 31, 2020, and $158 million since December 31, 2019 [33] Business Line Data and Key Metrics Changes - Total ARR reached approximately $873 million as of June 30, 2020, reflecting year-over-year growth of 10% on a reported basis and 11% on a constant currency basis [23] - Non-GAAP subscription revenue for Q2 2020 was $96 million, growing 20% year-over-year, while total non-GAAP recurring revenue grew at 11%, reaching $213 million [35] - Non-GAAP license revenue in Q2 2020 totaled $33.7 million, reflecting a year-over-year decrease of approximately 14% [40] Market Data and Key Metrics Changes - Customer retention rates for the first six months of 2020 remained stable, with maintenance renewal rates over 92% [29] - The number of customers spending over $100,000 increased by 23% year-over-year to 958 customers [24] - The company closed the largest commercial transaction in its history with a global financial institution, significantly expanding its product footprint [26] Company Strategy and Development Direction - The company is exploring a potential spin-off of its MSP business to optimize growth and performance of both the MSP and core IT management businesses [11][65] - The core IT management business is projected to generate over $700 million in revenue in 2020, with a growth rate in the mid-single digits [63] - The company aims to leverage its disruptive go-to-market approach to capture market share during economic disruptions [20][53] Management's Comments on Operating Environment and Future Outlook - Management noted an increase in budget pressure among technology professionals, with expectations of continued budget constraints in the second half of the year [18] - Despite economic challenges, the company has seen resilience in IT spending from small and medium-sized businesses [54] - The outlook for Q3 2020 anticipates total revenue in the range of $254 million to $259 million, representing year-over-year growth of 5% to 7% [48] Other Important Information - The company has launched subscription pricing options for its Orion product portfolio, resulting in over 60 subscription transactions in Q2 2020 [21] - The company is focused on database performance management as a significant growth opportunity, with revenue in this area growing over 30% in Q2 2020 [28] - The management team is committed to a seamless leadership transition as they explore the potential spin-off [81][87] Q&A Session Summary Question: Can you outline the key decision points remaining in the spin-off process? - The company is still early in the exploration process, with operational work needed to understand how to split the businesses effectively [94][95] Question: What are the shared functions and potential dissynergies in the spin-off? - There are shared functions in finance, legal, and IT that will need to be addressed, but operational costs are aligned to different business units [100] Question: How is the cloud management piece trending? - The MSP business is expected to approach $300 million in subscription revenue in 2020, with growth in cloud management products being an important part of the future strategy [107][108]

Q2'20 Results August 6th, 2020 © 2020 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 COVID-19 pandemic and related global economic environment on our business, the potential spin-off of our M ...

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, 2020 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) (State or other jurisdiction of incorporatio ...

[Special Note Regarding Forward-Looking Statements](index=3&type=section&id=SPECIAL%20NOTE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This note identifies forward-looking statements, key risk factors, and the company's limited obligation to update them - Forward-looking statements are identified by terms such as **"aim," "anticipate," "believe,"** and include financial projections, future financial performance, and plans for future operations[12](index=12&type=chunk)[14](index=14&type=chunk) - Key risk factors that could cause actual results to differ materially include the inability to generate high-quality sales leads, failure to sell products to new or existing customers, decline in renewal or net retention rates, challenges in integrating acquisitions, risks associated with international operations, general economic conditions, and the timing and success of new product introductions[13](index=13&type=chunk) - The company assumes no obligation to publicly update these forward-looking statements or the reasons actual results could differ, except as required by law[13](index=13&type=chunk) PART I [Item 1. Business](index=4&type=section&id=Item%201.%20Business) SolarWinds is a leading IT infrastructure management software provider, employing its "SolarWinds Model" to grow recurring revenue [Overview](index=4&type=section&id=Overview) SolarWinds provides IT infrastructure management software, using its "SolarWinds Model" to generate subscription and maintenance revenue - SolarWinds is a leading provider of IT infrastructure management software, enabling organizations worldwide to monitor and manage their IT environments across on-premise, cloud, or hybrid models[16](index=16&type=chunk) - The company's "SolarWinds Model" combines powerful, scalable, affordable, and easy-to-use products with a high-velocity, low-touch digital marketing and direct inside sales approach[16](index=16&type=chunk)[18](index=18&type=chunk)[20](index=20&type=chunk) - Revenue is generated from subscription (MSP, application performance management, IT service management) and license/maintenance (on-premise network and IT operations management perpetual license) products, with a focus on increasing subscription and maintenance revenue[23](index=23&type=chunk) [The SolarWinds Model](index=4&type=section&id=The%20SolarWinds%20Model) The SolarWinds Model guides product development, digital marketing, and inside sales to foster long-term customer relationships - The SolarWinds Model is guided by **five principles**: focusing on technology professionals, building great products for the entire market, capturing demand using cost-efficient digital marketing, selling from the inside, and focusing on long-term customer relationships[27](index=27&type=chunk)[28](index=28&type=chunk)[30](index=30&type=chunk)[32](index=32&type=chunk)[34](index=34&type=chunk) - Products are designed to be easy to access, try, buy, deploy, and use, often built on common technology platforms that allow customers to purchase individually or as integrated suites[29](index=29&type=chunk) - Digital marketing leverages online tools, including the THWACK community, search engines, email campaigns, and webinars, to efficiently drive website traffic and high-quality leads[30](index=30&type=chunk)[31](index=31&type=chunk)[65](index=65&type=chunk) - The 'selling from the inside' approach utilizes a prescriptive, metrics-based sales process to efficiently close transactions of all sizes without the need for a traditional outside sales force or professional services[32](index=32&type=chunk)[33](index=33&type=chunk)[66](index=66&type=chunk) [Growth Strategies](index=6&type=section&id=Growth%20Strategies) Growth strategies include new customer acquisition, increased penetration, international expansion, product innovation, and targeted acquisitions - Key growth strategies include winning new customers using the SolarWinds Model, increasing penetration within the existing customer base by selling additional products, and expanding the international footprint, particularly for application performance management and ITSM products[35](index=35&type=chunk)[36](index=36&type=chunk)[37](index=37&type=chunk) - The company plans to continue innovation by bringing new products and tools to market, enhancing existing product functionality and integration, and expanding into new markets where the SolarWinds Model provides competitive advantages[38](index=38&type=chunk)[39](index=39&type=chunk) - SolarWinds intends to pursue targeted acquisitions that complement its product portfolio, capabilities, or provide access to new markets, with a focus on integrating acquired companies into the SolarWinds Model[40](index=40&type=chunk) [Our Customers and Market](index=8&type=section&id=Our%20Customers%20and%20Market) SolarWinds serves over 320,000 customers in a complex IT market, where technology professionals seek purpose-built, easy-to-use solutions - As of December 31, 2019, SolarWinds served over **320,000 customers**, ranging from very small businesses to large enterprises, with many initially purchasing one product and expanding over time[41](index=41&type=chunk)[42](index=42&type=chunk) - The market is characterized by growing IT complexity due to on-premise, public/private cloud, and hybrid environments, making performance monitoring and management critical[44](index=44&type=chunk)[45](index=45&type=chunk) - Technology professionals are increasingly empowered in IT purchasing decisions, preferring to trial software and select products that address specific challenges[47](index=47&type=chunk) - Existing alternative IT management solutions often have limitations such as high cost, complexity, inflexibility, and a need for significant professional services, creating a significant market opportunity for purpose-built solutions[49](index=49&type=chunk)[50](index=50&type=chunk) [Product Portfolio and Technology Platforms](index=10&type=section&id=Product%20Portfolio%20and%20Technology%20Platforms) SolarWinds offers over 50 infrastructure-agnostic products for IT operations and MSPs, guided by purpose-building and community-driven roadmaps - SolarWinds offers over **50 infrastructure-location agnostic products** to monitor and manage network, systems, desktop, application, storage, database, website infrastructures, and IT service desks[51](index=51&type=chunk) - Product development is guided by principles including purpose-building for technology professionals, community-driven roadmaps, ease of use, and integrated user experience[52](index=52&type=chunk) - IT Operations Management (ITOM) products provide hybrid IT performance management with deep visibility into applications and the full IT stack, covering network, infrastructure, application performance, service management, and IT security[54](index=54&type=chunk)[55](index=55&type=chunk)[56](index=56&type=chunk)[57](index=57&type=chunk) - MSP products deliver broad, scalable IT service management solutions for Managed Service Providers to manage SMB end-customers, including remote monitoring, endpoint detection and response, patch management, backup, and email protection[59](index=59&type=chunk)[60](index=60&type=chunk) [Marketing and Sales](index=12&type=section&id=Marketing%20and%20Sales) The company employs a low-touch, high-velocity digital marketing and inside sales approach, leveraging online tools and a dedicated sales team - The company employs a **low-touch, high-velocity digital marketing** and 'selling from the inside' approach, targeting technology professionals directly[61](index=61&type=chunk)[62](index=62&type=chunk) - Marketing efforts utilize digital tools like search engines, email campaigns, social media, blogs, webinars, and the online community THWACK to drive website traffic and high-quality product trial leads[63](index=63&type=chunk)[64](index=64&type=chunk)[65](index=65&type=chunk) - The sales organization consists of a dedicated sales team for new products and a retention/maintenance renewal team, both operating from inside offices without an outside sales force[66](index=66&type=chunk)[67](index=67&type=chunk)[68](index=68&type=chunk) - Software is also sold through distributors and resellers to expand global presence and reach various market segments, including government and commercial customers[69](index=69&type=chunk) [Research and Development](index=12&type=section&id=Research%20and%20Development) The R&D organization designs, develops, and deploys new products and improvements using a responsive, cost-efficient, and agile global model - The R&D organization is responsible for the design, development, testing, and deployment of new products and improvements, focusing on integration and complementarity[70](index=70&type=chunk) - The software development process is responsive to customer needs, cost-efficient, and agile, involving close collaboration with the user community[71](index=71&type=chunk) - A **low-cost global development model**, utilizing small scrum teams and diverse labor markets, enables rapid, efficient, and cost-effective software releases[72](index=72&type=chunk)[73](index=73&type=chunk) [Competition](index=13&type=section&id=Competition) SolarWinds operates in a highly competitive industry, facing diverse vendors, with competition based on product capabilities, cost, and customer success - SolarWinds operates in a highly competitive industry characterized by constant change and innovation, with evolving customer requirements[74](index=74&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[74](index=74&type=chunk) - Principal competitive factors include brand awareness, product capabilities (scalability, performance, reliability), ease of use, total cost of ownership, flexible deployment models, sales and marketing efforts, and customer success[74](index=74&type=chunk) [Intellectual Property](index=13&type=section&id=Intellectual%20Property) The company protects its proprietary rights through patents, copyrights, trademarks, and trade secrets, acknowledging enforcement limitations - The company relies on a combination of patent, copyright, trademark, trade dress, and trade secret laws, along with confidentiality procedures and contractual restrictions, to protect its proprietary rights[75](index=75&type=chunk) - As of December 31, 2019, SolarWinds owned approximately **33 issued U.S. patents** and **172 issued foreign patents**, with **58 pending patent applications**[75](index=75&type=chunk) - Intellectual property protection is limited, and patents may be challenged, invalidated, or circumvented; enforcement can be difficult and costly, and effective protection may not be available in all countries[75](index=75&type=chunk)[76](index=76&type=chunk)[77](index=77&type=chunk) [Employees](index=14&type=section&id=Employees) As of December 31, 2019, SolarWinds had 3,251 employees globally and maintains good employee relations without collective bargaining agreements - As of December 31, 2019, SolarWinds had **3,251 employees**, with **1,161 in the United States** and **2,090 outside the United States**[78](index=78&type=chunk) - The company considers its relationship with employees to be good and is not party to any collective bargaining agreement[78](index=78&type=chunk) [Additional Information](index=14&type=section&id=Additional%20Information) The company's website and the SEC's site provide access to its SEC filings, including Annual and Quarterly Reports - The company's website is **www.solarwinds.com**, where SEC filings (Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K) are made available free of charge[79](index=79&type=chunk) - Additional filings are also available on the SEC's Internet site (**http://www.sec.gov**)[79](index=79&type=chunk) [Item 1A. Risk Factors](index=15&type=section&id=Item%201A.%20Risk%20Factors) This section details various operational, financial, competitive, legal, and regulatory risks that could materially affect SolarWinds' business and results - Operational risks include fluctuations in quarterly revenue and operating results, inability to generate high-quality sales leads from digital marketing, failure to sell products to new or existing customers, and a decline in maintenance or subscription renewal rates[81](index=81&type=chunk)[83](index=83&type=chunk)[88](index=88&type=chunk)[91](index=91&type=chunk) - The company faces risks associated with managing rapid growth, including increases in employees and infrastructure, and challenges in international operations such as currency fluctuations, regulatory complexities, and political instability[93](index=93&type=chunk)[94](index=94&type=chunk) - Technology and security risks include system failures, cyberattacks, data security incidents, material defects or errors in products, and reliance on third-party software, which could lead to revenue loss, increased costs, and reputational harm[108](index=108&type=chunk)[110](index=110&type=chunk)[141](index=141&type=chunk)[157](index=157&type=chunk) - Acquisitions present risks such as difficulties in integrating operations, diversion of management attention, inability to maintain key business relationships, increased costs, and potential for greater-than-expected liabilities[112](index=112&type=chunk)[116](index=116&type=chunk)[117](index=117&type=chunk) - Competitive risks arise from operating in highly competitive markets with constant innovation, facing large IT vendors and smaller specialized companies, and the potential for competitors to offer more comprehensive or attractively priced solutions[100](index=100&type=chunk)[101](index=101&type=chunk)[102](index=102&type=chunk) - Financial risks include substantial indebtedness, restrictions and limitations imposed by debt agreements, exposure to fluctuations in interest rates, and potential adverse impacts from changes in tax laws or financial accounting standards[158](index=158&type=chunk)[162](index=162&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk)[177](index=177&type=chunk)[178](index=178&type=chunk)[180](index=180&type=chunk)[181](index=181&type=chunk) - Risks related to common stock ownership include potential volatility in the trading price of common stock, dilution from future issuances of additional capital stock, and anti-takeover provisions in the company's charter and bylaws[188](index=188&type=chunk)[196](index=196&type=chunk)[198](index=198&type=chunk) [Item 1B. Unresolved Staff Comments](index=41&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reported no unresolved staff comments from the SEC - There are **no unresolved staff comments**[210](index=210&type=chunk) [Item 2. Properties](index=41&type=section&id=Item%202.%20Properties) SolarWinds leases all its office spaces, including its corporate headquarters and various domestic and international facilities, which are deemed adequate - SolarWinds leases all its offices and does not own any real estate, including its corporate headquarters in Austin, Texas (approximately **348,000 square feet**)[211](index=211&type=chunk) - The company leases office space domestically and internationally in locations such as Cork (Ireland), Brno (Czech Republic), Durham (North Carolina), Manila (Philippines), Ottawa (Canada), Dundee (United Kingdom), Krakow (Poland), Lehi (Utah), and Singapore[211](index=211&type=chunk) - Current facilities are considered adequate for the foreseeable future, and additional or substitute space is expected to be obtainable on acceptable, commercially reasonable terms[212](index=212&type=chunk) [Item 3. Legal Proceedings](index=41&type=section&id=Item%203.%20Legal%20Proceedings) The company is not a party to any material legal proceedings, and management expects no material adverse impact from pending claims - SolarWinds is **not currently a party to any material legal proceeding**, nor is any of its property the subject of such proceedings[213](index=213&type=chunk) - Management believes that the resolution of any pending claims, individually or in aggregate, is **not expected to have a material adverse impact** on the company's consolidated financial statements, cash flows, or financial position[213](index=213&type=chunk) [Item 4. Mine Safety Disclosures](index=41&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to SolarWinds Corporation - This item is **not applicable**[214](index=214&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=42&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) SolarWinds common stock has been listed on the NYSE since October 2018, with no cash dividends planned and limited share repurchases for employee vesting - SolarWinds common stock (SWI) has been listed on the New York Stock Exchange (NYSE) since **October 19, 2018**, with an initial public offering (IPO) price of **$15.00 per share**[216](index=216&type=chunk) - As of February 14, 2020, the last reported sales price of common stock was **$18.57 per share**, with **102 holders of record**[217](index=217&type=chunk) - The company has **never declared or paid cash dividends** on its common stock and intends to retain all available funds and future earnings for business operations and expansion[218](index=218&type=chunk) Issuer Purchases of Securities (Q4 2019) | Period | Number of Shares Purchased | | :------------------ | :------------------------- | | November 1-30, 2019 | 14,800 | | December 1-31, 2019 | 42,500 | | **Total** | **57,300** | - All share repurchases in Q4 2019 were related to employee-held restricted stock subject to vesting, resulting from the company exercising its right of repurchase, and **not pursuant to a publicly announced plan or program**[224](index=224&type=chunk) [Item 6. Selected Consolidated Financial Data](index=44&type=section&id=Item%206.%20Selected%20Consolidated%20Financial%20Data) This section presents selected consolidated financial data, highlighting the 2016 "Take Private" transaction and the 2019 adoption of ASC 606 and ASC 842 - The company was acquired in a **"Take Private" transaction in February 2016**, leading to the application of purchase accounting[226](index=226&type=chunk) - Effective **January 1, 2019**, SolarWinds adopted FASB ASC No. 2014-09 "Revenue from Contracts with Customers" (**ASC 606**) using the modified retrospective method[230](index=230&type=chunk) - Effective **December 31, 2019**, the company retroactively adopted FASB ASC No. 2016-02 "Leases" (**ASC 842**) as of January 1, 2019, resulting in operating leases being reported on the consolidated balance sheet[231](index=231&type=chunk) Selected Consolidated Statements of Operations Data (in thousands, except per share data) | Metric | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :-------------------------- | :---------------------- | :---------------------- | :---------------------- | | Subscription Revenue | $320,747 | $265,591 | $213,754 | | Maintenance Revenue | $446,450 | $402,938 | $357,630 | | Total Recurring Revenue | $767,197 | $668,529 | $571,384 | | License Revenue | $165,328 | $164,560 | $156,633 | | **Total Revenue** | **$932,525** | **$833,089** | **$728,017** | | Cost of revenue | $255,454 | $246,735 | $231,731 | | Gross profit | $677,071 | $586,354 | $496,286 | | Operating expenses | $541,898 | $471,169 | $426,632 | | Operating income (loss) | $135,173 | $115,185 | $69,654 | | Interest expense, net | $(108,071) | $(142,008) | $(169,786) | | Other income (expense), net | $402 | $(94,887) | $38,664 | | Income (loss) before income taxes | $27,504 | $(121,710) | $(61,468) | | Income tax expense (benefit) | $8,862 | $(19,644) | $22,398 | | **Net income (loss)** | **$18,642** | **$(102,066)** | **$(83,866)** | | Basic earnings (loss) per share | $0.06 | $2.60 | $(3.50) | | Diluted earnings (loss) per share | $0.06 | $2.56 | $(3.50) | Selected Consolidated Balance Sheet Data (in thousands) | Metric | As of Dec 31, 2019 | As of Dec 31, 2018 | As of Dec 31, 2017 | As of Dec 31, 2016 | | :---------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Cash and cash equivalents | $173,372 | $382,620 | $277,716 | $101,643 | | Working capital, excluding deferred revenue | $209,113 | $402,639 | $302,012 | $158,637 | | Total assets | $5,310,742 | $5,194,649 | $5,327,064 | $5,202,689 | | Deferred revenue, current and non-current portion | $343,400 | $296,132 | $261,791 | $217,722 | | Long-term debt, net of current portion | $1,893,406 | $1,904,072 | $2,245,622 | $2,242,892 | | Total liabilities | $2,661,220 | $2,578,549 | $2,909,938 | $2,842,828 | | Total stockholders' equity (deficit) | $2,649,522 | $2,616,100 | $(729,761) | $(519,643) | [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=47&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section discusses SolarWinds' business, financial highlights, revenue, expenses, liquidity, capital resources, and critical accounting policies [Overview](index=47&type=section&id=Overview) SolarWinds is a leading IT infrastructure management software provider, offering over 50 products and focusing on growth and profitability - SolarWinds is a leading provider of IT infrastructure management software, offering over **50 infrastructure-location agnostic products** to monitor and manage various IT environments (on-premise, cloud, hybrid)[241](index=241&type=chunk)[242](index=242&type=chunk) - The company's "SolarWinds Model" is focused on achieving both growth and profitability by delivering powerful, scalable, affordable, and easy-to-use products[241](index=241&type=chunk)[243](index=243&type=chunk) [Financial Highlights](index=47&type=section&id=Financial%20Highlights) This section summarizes SolarWinds' 2019 financial performance, including revenue, customer base, profitability, cash flow, and key acquisitions Revenue Highlights (in millions) | Metric | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | YoY Change | | :-------------------- | :---------------------- | :---------------------- | :--------- | | Total Revenue (GAAP) | $932.5 | $833.1 | +11.9% | | Total Revenue (Non-GAAP) | $938.5 | $836.8 | +12.1% | | Recurring Revenue % of Total | 82% | 80% | +2 ppts | | Subscription ARR | $370.3 | $283.5 | +30.6% | | Total ARR | $845.1 | $709.7 | +19.1% | - As of December 31, 2019, SolarWinds had over **320,000 customers**, with **897 customers spending more than $100,000** in 2019[246](index=246&type=chunk) Profitability and Cash Flow Highlights (in millions) | Metric | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | YoY Change | | :-------------------- | :---------------------- | :---------------------- | :--------- | | Net Income (Loss) | $18.6 | $(102.1) | N/A | | Adjusted EBITDA | $453.6 | $407.5 | +11.3% | | Cash Flows from Operations | $299.9 | $254.1 | +18.0% | - In 2019, SolarWinds acquired SAManage Ltd. for approximately **$342.1 million** to enter the IT service management (ITSM) market and VividCortex, Inc. for approximately **$117.6 million** for SaaS-based database performance management[252](index=252&type=chunk)[253](index=253&type=chunk) - The company completed its IPO in **October 2018**, raising **$375.0 million** in gross proceeds, and a follow-on offering by selling stockholders in **May 2019**[254](index=254&type=chunk)[255](index=255&type=chunk) [Components of Our Results of Operations](index=49&type=section&id=Components%20of%20Our%20Results%20of%20Operations) This section details SolarWinds' revenue components, operating expenses, and other income/expense items, outlining their recognition and composition - Revenue consists of recurring revenue (subscription and maintenance) and perpetual license revenue[256](index=256&type=chunk) - Subscription revenue is primarily derived from SaaS offerings and time-based license arrangements (MSP, application performance management, ITSM products), recognized ratably over the subscription term or upon service availability[256](index=256&type=chunk) - Maintenance revenue comes from maintenance services associated with perpetual license products, recognized ratably over the contract period[256](index=256&type=chunk) - License revenue is from sales of perpetual licenses, recognized upon delivery of the electronic license key[256](index=256&type=chunk)[258](index=258&type=chunk) - Operating expenses include sales and marketing, research and development, general and administrative expenses, and amortization of acquired intangibles, with personnel costs being the most significant component[259](index=259&type=chunk)[264](index=264&type=chunk) - Other income (expense) primarily includes interest expense, gains/losses from foreign currency exchange rates on intercompany loans, and losses on extinguishment of debt[260](index=260&type=chunk) [Comparison of the Years Ended December 31, 2019 and 2018](index=53&type=section&id=Comparison%20of%20the%20Years%20Ended%20December%2031%2C%202019%20and%202018) This section compares SolarWinds' 2019 and 2018 financial performance, detailing changes in revenue, operating expenses, interest, and income taxes Revenue Comparison (in thousands, except percentages) | Category | 2019 Amount | 2019 % of Revenue | 2018 Amount | 2018 % of Revenue | Change | | :-------------------- | :------------ | :---------------- | :------------ | :---------------- | :------- | | Subscription | $320,747 | 34.4% | $265,591 | 31.9% | $55,156 | | Maintenance | $446,450 | 47.9% | $402,938 | 48.4% | $43,512 | | Total recurring revenue | $767,197 | 82.3% | $668,529 | 80.2% | $98,668 | | License | $165,328 | 17.7% | $164,560 | 19.8% | $768 | | **Total revenue** | **$932,525** | **100.0%** | **$833,089** | **100.0%** | **$99,436** | - Total revenue increased by **$99.4 million (11.9%)** in 2019, with North America contributing approximately **66% of total revenue**[267](index=267&type=chunk) - Subscription revenue increased **20.8%** due to sales of MSP products and the acquired SolarWinds Service Desk, partially offset by foreign currency weakening. The net retention rate for subscription products was approximately **105%** for both 2019 and 2018[268](index=268&type=chunk)[269](index=269&type=chunk) - Maintenance revenue increased **10.8%** due to a growing customer base and strong renewal rates (**94% in 2019, 95% in 2018**)[270](index=270&type=chunk)[271](index=271&type=chunk) Operating Expenses Comparison (in thousands, except percentages) | Category | 2019 Amount | 2019 % of Revenue | 2018 Amount | 2018 % of Revenue | Change | | :-------------------------- | :------------ | :---------------- | :------------ | :---------------- | :------- | | Sales and marketing | $264,199 | 28.3% | $227,468 | 27.3% | $36,731 | | Research and development | $110,362 | 11.8% | $96,272 | 11.6% | $14,090 | | General and administrative | $97,525 | 10.5% | $80,641 | 9.7% | $16,884 | | Amortization of acquired intangibles | $69,812 | 7.5% | $66,788 | 8.0% | $3,024 | | **Total operating expenses** | **$541,898** | **58.1%** | **$471,169** | **56.6%** | **$70,729** | - Interest expense, net, decreased by **$33.9 million (23.9%)** due to the repayment of **$315.0 million** in outstanding borrowings and a reduction in interest rate spread[281](index=281&type=chunk) - Income tax expense increased by **$28.5 million**, with the effective tax rate rising to **32.2% in 2019** from **16.1% in 2018**, primarily due to a valuation allowance against deferred tax assets from the Samanage acquisition, partially offset by the foreign-derived intangible income deduction[283](index=283&type=chunk)[284](index=284&type=chunk) [Non-GAAP Financial Measures](index=59&type=section&id=Non-GAAP%20Financial%20Measures) This section explains the use of non-GAAP financial measures to clarify SolarWinds' core operating performance by excluding specific items - Non-GAAP financial measures are used to clarify and enhance understanding of performance by excluding items management does not consider part of core operating results, such as purchase accounting impact, amortization of acquired intangibles, stock-based compensation, acquisition/Sponsor related costs, and restructuring charges[286](index=286&type=chunk)[290](index=290&type=chunk) Non-GAAP Revenue (in thousands) | Metric | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :-------------------- | :---------------------- | :---------------------- | :---------------------- | | GAAP total revenue | $932,525 | $833,089 | $728,017 | | Impact of purchase accounting | $5,930 | $3,716 | $12,981 | | **Total non-GAAP revenue** | **$938,455** | **$836,805** | **$740,998** | Non-GAAP Operating Income and Margin (in thousands, except margin data) | Metric | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :-------------------- | :---------------------- | :---------------------- | :---------------------- | | GAAP operating income | $135,173 | $115,185 | $69,654 | | Non-GAAP operating income | $436,210 | $390,913 | $347,266 | | GAAP operating margin | 14.5% | 13.8% | 9.6% | | Non-GAAP operating margin | 46.5% | 46.7% | 46.9% | Adjusted EBITDA and Margin (in thousands, except margin data) | Metric | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :-------------------- | :---------------------- | :---------------------- | :---------------------- | | Net income (loss) | $18,642 | $(102,066) | $(83,866) | | Adjusted EBITDA | $453,633 | $407,511 | $361,871 | | Adjusted EBITDA margin | 48.3% | 48.7% | 48.8% | [Liquidity and Capital Resources](index=61&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses SolarWinds' cash, liquidity sources, total indebtedness, borrowing capacity, and future contractual obligations - Cash and cash equivalents were **$173.4 million** as of December 31, 2019, with approximately **$134.6 million** held by international subsidiaries[296](index=296&type=chunk) - The primary source of cash is operating activities, and existing cash, operating cash flows, and borrowing capacity are expected to be sufficient for at least the **next 12 months**[297](index=297&type=chunk) - Total indebtedness was **$2.0 billion** as of December 31, 2019, with **$125.0 million** available for additional borrowing under revolving credit facilities[300](index=300&type=chunk) - The First Lien Credit Agreement provides a **$125.0 million revolving credit facility** and a **$1,990.0 million First Lien Term Loan** maturing on **February 5, 2024**[302](index=302&type=chunk)[304](index=304&type=chunk) - The **$315.0 million Second Lien Credit Facility** was fully repaid in **October 2018** using proceeds from the IPO[305](index=305&type=chunk)[306](index=306&type=chunk) Summary of Cash Flows (in thousands) | Metric | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | | :-------------------------------- | :---------------------- | :---------------------- | | Net cash provided by operating activities | $299,907 | $254,142 | | Net cash used in investing activities | $(482,453) | $(67,993) | | Net cash used in financing activities | $(25,624) | $(75,724) | | Net increase (decrease) in cash and cash equivalents | $(209,248) | $104,904 | Contractual Obligations and Commitments (as of Dec 31, 2019, in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :-------------------------- | :---------- | :--------------- | :---------- | :---------- | :---------------- | | Long-term debt obligations | $1,950,200 | $19,900 | $39,800 | $1,890,500 | $0 | | Cash interest expense | $361,207 | $89,854 | $176,462 | $94,891 | $0 | | Operating leases | $130,069 | $17,489 | $33,774 | $30,154 | $48,652 | | Purchase obligations | $77,145 | $74,070 | $3,075 | $0 | $0 | | Transition tax payable | $95,699 | $8,893 | $17,785 | $35,415 | $33,606 | | **Total** | **$2,614,320** | **$210,206** | **$270,896** | **$2,050,960** | **$82,258** | [Critical Accounting Policies and Estimates](index=65&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section outlines SolarWinds' critical accounting policies and estimates, involving significant management judgment for goodwill, intangibles, revenue, and taxes - Critical accounting policies involve significant management judgment and estimates, particularly in the valuation of goodwill, intangibles, long-lived assets, and contingent consideration[318](index=318&type=chunk)[319](index=319&type=chunk)[322](index=322&type=chunk) - Revenue recognition (**ASC 606**) requires judgment in identifying distinct performance obligations and allocating transaction prices based on estimated standalone selling prices[323](index=323&type=chunk)[324](index=324&type=chunk)[325](index=325&type=chunk) - Stock-based compensation expense is measured at fair value on the grant date, with estimates for options using the Black-Scholes model and performance-based awards adjusted for probability of achievement[326](index=326&type=chunk)[327](index=327&type=chunk) - Income taxes are accounted for using the liability method, involving judgments on tax positions, deferred tax assets/liabilities, and the establishment of valuation allowances based on expected realization[328](index=328&type=chunk)[329](index=329&type=chunk)[331](index=331&type=chunk) [Off-Balance Sheet Arrangements](index=67&type=section&id=Off-Balance%20Sheet%20Arrangements) As of December 31, 2019, SolarWinds reported no off-balance sheet arrangements with unconsolidated organizations or financial partnerships - As of December 31, 2019, SolarWinds did **not have any relationships with unconsolidated organizations or financial partnerships** for off-balance sheet arrangements[334](index=334&type=chunk) [Recent Accounting Pronouncements](index=67&type=section&id=Recent%20Accounting%20Pronouncements) A full description of recent accounting pronouncements is incorporated by reference from Note 2. Summary of Significant Accounting Policies - A full description of recent accounting pronouncements is incorporated by reference from Note 2. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements[335](index=335&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=67&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section discusses SolarWinds' exposure to market risks, primarily interest rate risk and foreign currency exchange risk, and the strategies employed to manage them - SolarWinds had total indebtedness of **$2.0 billion** at December 31, 2019, with borrowings subject to variable interest rates (weighted-average rate of **4.55%**)[338](index=338&type=chunk) - A hypothetical **100 basis point increase** in interest rates would result in an approximate **$19.5 million increase** in annual interest expense[338](index=338&type=chunk) - The company faces foreign currency exchange risk due to international business operations in multiple currencies (Euro, British Pound Sterling, Australian Dollar against USD)[340](index=340&type=chunk) - SolarWinds uses purchased foreign currency forward contracts to minimize foreign exchange exposure on certain balance sheet positions, but had **no such contracts outstanding** as of December 31, 2019[344](index=344&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=68&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This item incorporates by reference the Consolidated Financial Statements and related notes from pages F-1 through F-44 of the report - The information required by this item is incorporated by reference to the Consolidated Financial Statements set forth on pages **F-1 through F-44** of this Annual Report on Form 10-K[347](index=347&type=chunk) [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=68&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reported no changes in or disagreements with its accountants on accounting and financial disclosure matters - There were **no changes in or disagreements** with the company's accountants on accounting and financial disclosure matters[348](index=348&type=chunk) [Item 9A. Controls and Procedures](index=68&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, excluding recently acquired entities - Management, with the participation of the CEO and CFO, concluded that the company's disclosure controls and procedures were **effective at a reasonable assurance level** as of December 31, 2019[349](index=349&type=chunk)[352](index=352&type=chunk) - Management concluded that the company's internal control over financial reporting was **effective** as of December 31, 2019, based on the COSO framework[353](index=353&type=chunk)[355](index=355&type=chunk) - SAManage, Ltd. and VividCortex, Inc., acquired during 2019, were **excluded from management's assessment** of internal control over financial reporting, collectively representing approximately **0.5% of total assets** and **1.4% of total revenue**[356](index=356&type=chunk)[398](index=398&type=chunk) - There were **no changes in internal control over financial reporting** during the quarter ended December 31, 2019, that materially affected or are reasonably likely to materially affect it[358](index=358&type=chunk) [Item 9B. Other Information](index=70&type=section&id=Item%209B.%20Other%20Information) No other information was reported under this item - **No other information was reported** under this item[359](index=359&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=71&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance, including the Code of Business Ethics, is incorporated by reference from the proxy statement - Information required by this item is incorporated by reference from the definitive proxy statement for the **2020 Annual Meeting of Stockholders**[363](index=363&type=chunk) - The board of directors has adopted a **Code of Business Ethics and Conduct** for all employees, including executive and senior financial officers, available on the investor relations portion of the company's website[364](index=364&type=chunk) [Item 11. Executive Compensation](index=71&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the definitive proxy statement - Information required by this item is incorporated by reference from the definitive proxy statement[365](index=365&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=71&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership of beneficial owners, management, and related stockholder matters is incorporated by reference from the proxy statement - Information required by this item is incorporated by reference from the definitive proxy statement[366](index=366&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=71&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding certain relationships and related transactions, and director independence, is incorporated by reference from the definitive proxy statement - Information required by this item is incorporated by reference from the definitive proxy statement[367](index=367&type=chunk) [Item 14. Principal Accountant Fees and Services](index=71&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the definitive proxy statement - Information required by this item is incorporated by reference from the definitive proxy statement[368](index=368&type=chunk) PART IV [Item 15. Exhibits, Financial Statement Schedules](index=72&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists financial statements, schedules, and exhibits, including the Independent Registered Public Accounting Firm's Report and various agreements - The section includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Redeemable Convertible Class A Common Stock and Stockholders' Equity (Deficit), Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements[372](index=372&type=chunk) - Financial Statement Schedules include **Schedule II—Valuation and Qualifying Accounts**[372](index=372&type=chunk) - An extensive Exhibit Index details various agreements (e.g., Share Purchase Agreement, Credit Agreements, Equity Plans) and certifications (CEO, CFO) filed as part of the report[374](index=374&type=chunk)[375](index=375&type=chunk)[376](index=376&type=chunk)[378](index=378&type=chunk) [Item 16. Form 10-K Summary](index=77&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company did not provide a Form 10-K Summary - **No Form 10-K Summary was provided**[379](index=379&type=chunk) [Signatures](index=78&type=section&id=Signatures) This section contains the signatures of the company's Chief Financial Officer, CEO, and other directors for the Annual Report - The Annual Report on Form 10-K was signed on **February 24, 2020**, by **J. Barton Kalsu** (Chief Financial Officer) and **Kevin B. Thompson** (President and Chief Executive Officer and Director), along with other directors[384](index=384&type=chunk)[386](index=386&type=chunk) [Index to Consolidated Financial Statements](index=80&type=section&id=INDEX%20TO%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This index lists the Report of Independent Registered Public Accounting Firm, Consolidated Financial Statements, and related notes and schedules - The index lists the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Redeemable Convertible Class A Common Stock and Stockholders' Equity (Deficit), and Consolidated Statements of Cash Flows[389](index=389&type=chunk) - It also includes Notes to Consolidated Financial Statements (Notes **1 through 18**) and **Schedule II - Valuation and Qualifying Accounts**[389](index=389&type=chunk) [Report of Independent Registered Public Accounting Firm](index=81&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) PricewaterhouseCoopers LLP issued an unqualified opinion on SolarWinds' financial statements and internal controls, noting accounting changes and critical audit matters - PricewaterhouseCoopers LLP issued an **unqualified opinion** on SolarWinds' consolidated financial statements as of December 31, 2019 and 2018, and on the effectiveness of its internal control over financial reporting as of December 31, 2019[392](index=392&type=chunk)[393](index=393&type=chunk) - The report highlights changes in accounting principles, specifically the adoption of new standards for revenue recognition (**ASC 606**) and leases (**ASC 842**) in 2019[394](index=394&type=chunk) - Critical audit matters included significant auditor subjectivity and effort in evaluating standalone selling prices for transactions with multiple performance obligations and the valuation of identifiable intangible assets related to the acquisition of SAManage Ltd[402](index=402&type=chunk)[403](index=403&type=chunk)[405](index=405&type=chunk)[406](index=406&type=chunk) - SAManage, Ltd. and VividCortex, Inc., acquired during 2019, were **excluded from the audit of internal control over financial reporting** due to the timing of their acquisition[398](index=398&type=chunk) [Notes to Consolidated Financial Statements](index=92&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) [Note 1. Organization and Nature of Operations](index=92&type=section&id=1.%20Organization%20and%20Nature%20of%20Operations) SolarWinds Corporation, an IT infrastructure management software provider, details its 2016 "Take Private" acquisition, 2018 IPO, and 2019 follow-on offering - SolarWinds Corporation is a leading provider of IT infrastructure management software, offering solutions for on-premise, cloud, and hybrid infrastructure models[427](index=427&type=chunk) - The company was acquired in a **"Take Private" transaction** by affiliates of Silver Lake and Thoma Bravo in **February 2016**[429](index=429&type=chunk) - SolarWinds completed its initial public offering (IPO) in **October 2018**, selling **25,000,000 shares** at **$15.00 per share**, raising **$375.0 million** in gross proceeds, a portion of which was used to repay **$315.0 million** in debt[430](index=430&type=chunk) - In **May 2019**, a follow-on offering of **15,000,000 shares** of common stock was completed by certain selling stockholders at **$18.00 per share**[432](index=432&type=chunk) [Note 2. Summary of Significant Accounting Policies](index=92&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines SolarWinds' significant accounting policies, including estimates, foreign currency, revenue recognition (ASC 606), leases (ASC 842), acquisitions, goodwill, and intangible assets - The preparation of financial statements requires significant management judgments and estimates, particularly for goodwill, intangibles, long-lived assets, contingent consideration, revenue recognition, stock-based compensation, and income taxes[436](index=436&type=chunk) - Effective **January 1, 2019**, SolarWinds adopted **ASC 606**, which changed the classification and timing of revenue recognition and required the deferral and amortization of certain sales commissions[443](index=443&type=chunk)[445](index=445&type=chunk) - Effective **December 31, 2019**, the company retroactively adopted **ASC 842** as of January 1, 2019, resulting in operating leases being reported on the consolidated balance sheet as right-of-use assets (**$98.3 million**) and lease liabilities (**$13.7 million current, $99.3 million non-current**) as of January 1, 2019[449](index=449&type=chunk)[453](index=453&type=chunk) - Acquired businesses' purchase prices are allocated to assets and liabilities at fair value, with the excess recorded as goodwill. Identifiable intangible assets are amortized on a straight-line basis over estimated useful lives of generally **two to ten years**[454](index=454&type=chunk)[455](index=455&type=chunk) - Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter, or more frequently if indicators arise; **no impairment was identified in 2019 or 2018**[456](index=456&type=chunk)[457](index=457&type=chunk) Deferred Revenue Balance (in thousands) | Metric | Amount | | :-------------------------- | :------- | | Balance at December 31, 2018 | $296,132 | | Adoption of ASC 606 | $(2,772) | | Deferred revenue recognized | $(445,726) | | Additional amounts deferred | $485,512 | | Deferred revenue acquired in business combinations | $10,254 | | **Balance at December 31, 2019** | **$343,400** | Deferred Commissions Balance (in thousands) | Metric | Amount | | :-------------------------- | :------- | | Balance at December 31, 2018 | $0 | | Adoption of ASC 606 | $5,157 | | Commissions capitalized | $7,888 | | Amortization recognized | $(2,421) | | **Balance at December 31, 2019** | **$10,624** | | Classified as: | | | Current | $2,543 | | Non-current | $8,081 | | **Total deferred commissions** | **$10,624** | [Note 3. Acquisitions](index=113&type=section&id=3.%20Acquisitions) This note details SolarWinds' 2019 and 2018 acquisition activities, including the purchase price, assets, liabilities, and financial impact of Samanage Ltd. and VividCortex, Inc. - On **April 30, 2019**, SolarWinds acquired SAManage Ltd., an IT service desk solution company, for approximately **$342.1 million**, entering the ITSM market[511](index=511&type=chunk) SAManage Ltd. Acquired Assets and Liabilities (in thousands) | Category | Total Fair Value | | :------------------------------------------ | :--------------- | | Current assets (including cash acquired of $6.2M) | $18,957 | | Property and equipment and other assets | $428 | | Identifiable intangible assets | $49,700 | | Goodwill | $286,208 | | Current liabilities | $(2,230) | | Other long-term liabilities | $(2,288) | | Deferred revenue | $(8,713) | | **Total consideration** | **$342,062** | - On **December 10, 2019**, SolarWinds acquired VividCortex, Inc., a SaaS-based database performance management solution company, for approximately **$117.6 million**[513](index=513&type=chunk) VividCortex, Inc. Acquired Assets and Liabilities (in thousands) | Category | Total Fair Value | | :------------------------------------------ | :--------------- | | Current assets (including cash acquired of $4.5M) | $5,395 | | Property and equipment and other assets | $3,485 | | Identifiable intangible assets | $11,800 | | Goodwill | $99,479 | | Current liabilities | $(565) | | Other long-term liabilities | $(491) | | Deferred revenue | $(1,507) | | **Total consideration** | **$117,596** | - In 2018, the company completed acquisitions for a combined purchase price of approximately **$62.9 million in cash**, resulting in **$18.4 million** in identifiable intangible assets and **$43.7 million** in goodwill[517](index=517&type=chunk)[518](index=518&type=chunk)[520](index=520&type=chunk) [Note 4. Goodwill and Intangible Assets](index=117&type=section&id=4.%20Goodwill%20and%20Intangible%20Assets) This note details changes in SolarWinds' goodwill and identifiable intangible assets, including balances, acquisitions, and amortization expenses Goodwill Balance (in thousands) | Date | Amount | | :-------------------- | :--------- | | Balance at December 31, 2017 | $3,695,640 | | Acquisitions | $43,746 | | Foreign currency translation and other adjustments | $(55,425) | | Balance at December 31, 2018 | $3,683,961 | | Acquisitions | $396,945 | | Foreign currency translation and other adjustments | $(22,708) | | **Balance at December 31, 2019** | **$4,058,198** | Intangible Assets (as of Dec 31, 2019, in thousands) | Asset Type | Gross Carrying Amount | Accumulated Amortization | Net Amount | | :-------------------------- | :-------------------- | :----------------------- | :--------- | | Developed product technologies | $1,038,143 | $(665,759) | $372,384 | | Customer relationships | $567,430 | $(251,728) | $315,702 | | Intellectual property | $1,103 | $(226) | $877 | | Trademarks | $84,054 | $(1,504) | $82,550 | | **Total intangible assets** | **$1,690,730** | **$(919,217)** | **$771,513** | Intangible Asset Amortization Expense (in thousands) | Year Ended Dec 31, | Amount | | :----------------- | :------- | | 2019 | $242,849 | | 2018 | $245,792 | | 2017 | $238,156 | Estimated Future Intangible Asset Amortization Expense (in thousands) | Year | Estimated Amortization | | :--- | :--------------------- | | 2020 | $251,116 | | 2021 | $220,666 | | 2022 | $78,495 | | 2023 | $51,846 | | 2024 | $42,384 | - Indefinite-lived trademarks, including SolarWinds and THWACK, amounted to **$82.4 million** at December 31, 2019, and are **not amortized**[526](index=526&type=chunk) [Note 5. Fair Value Measurements](index=119&type=section&id=5.%20Fair%20Value%20Measurements) This note summarizes fair value measurements of SolarWinds' financial assets, primarily money market funds and a trading security, and notes long-term debt's carrying value approximates fair value Fair Value Measurements at December 31, 2019 (in thousands) | Asset | Level 1 | Level 2 | Level 3 | Total | | :---------------- | :------ | :------ | :------ | :------ | | Money market funds | $0 | $4,559 | $0 | $4,559 | | Trading security | $0 | $0 | $5,000 | $5,000 | | **Total assets** | **$0** | **$4,559** | **$5,000** | **$9,559** | - There were **no transfers between fair value measurement levels** during the year ended December 31, 2019[527](index=527&type=chunk) - The carrying value of long-term debt approximates its estimated fair value as the interest rate on the debt agreements is adjusted for changes in market rates[529](index=529&type=chunk) [Note 6. Property and Equipment](index=121&type=section&id=6.%20Property%20and%20Equipment) This note details SolarWinds' property and equipment, including their cost, accumulated depreciation, and annual depreciation expense Property and Equipment, Net (in thousands) | Asset Type | Dec 31, 2019 | Dec 31, 2018 | | :-------------------------- | :----------- | :----------- | | Equipment, servers and computers | $42,583 | $32,081 | | Furniture and fixtures | $8,226 | $7,393 | | Software | $2,473 | $2,475 | | Leasehold improvements | $23,440 | $21,341 | | **Total Gross** | **$76,722** | **$63,290** | | Less: Accumulated depreciation and amortization | $(37,777) | $(27,426) | | **Property and equipment, net** | **$38,945** | **$35,864** | Depreciation and Amortization Expense on Property and Equipment (in thousands) | Year Ended Dec 31, | Amount | | :----------------- | :------- | | 2019 | $13,947 | | 2018 | $13,007 | | 2017 | $11,617 | [Note 7. Leases](index=121&type=section&id=7.%20Leases) This note describes SolarWinds' lease arrangements, the impact of ASC 842 adoption, and details operating lease costs, maturities, and cash flow - SolarWinds leases offices globally, including its corporate headquarters in Austin, Texas, and various international locations, with lease terms ranging from **less than one year to 13 years**[532](index=532&type=chunk) - Upon adoption of ASC 842 as of **January 1, 2019**, the company recorded **$98.3 million** in operating lease assets, **$13.7 million** in current operating lease liabilities, and **$99.3 million** in non-current operating lease liabilities[453](index=453&type=chunk) Operating Lease Costs for the Year Ended December 31, 2019 (in thousands) | Component | Amount | | :---------------------- | :------- | | Operating lease costs | $19,990 | | Variable lease costs | $3,258 | | Short-term lease costs | $737 | | Sublease income received | $(1,909) | | **Total lease costs** | **$22,076** | Maturities of Operating Lease Liabilities as of December 31, 2019 (in thousands) | Year | Amount | | :--- | :------- | | 2020 | $17,489 | | 2021 | $17,479 | | 2022 | $16,295 | | 2023 | $15,415 | | 2024 | $14,739 | | Thereafter | $48,652 | | **Total minimum lease payments** | **$130,069** | | Less: imputed interest | $(22,892) | | **Present value of operating lease liabilities** | **$107,177** | - As of December 31, 2019, the weighted-average remaining lease term for operating leases was **7.6 years**, and the weighted-average discount rate used was **5.0%**[535](index=535&type=chunk) [Note 8. Accrued Liabilities and Other](index=124&type=section&id=8.%20Accrued%20Liabilities%20and%20Other) This note provides a breakdown of SolarWinds' accrued liabilities and other current liabilities, primarily consisting of payroll-related accruals and other accrued expenses Accrued Liabilities and Other Current Liabilities (in thousands) | Category | Dec 31, 2019 | Dec 31, 2018 | | :-------------------------------- | :----------- | :----------- | | Payroll-related accruals | $31,614 | $31,028 | | Other accrued expenses and current liabilities | $15,421 | $21,027 | | **Total accrued liabilities and other** | **$47,035** | **$52,055** | [Note 9. Debt](index=124&type=section&id=9.%20Debt) This note details SolarWinds' debt structure, including Senior Secured First Lien Credit Facilities and Second Lien Credit Facility repayment, outlining principal, rates, and future payments Debt Summary (in thousands, except interest rates) | Metric | Dec 31, 2019 Amount | Dec 31, 2019 Effective Rate | Dec 31, 2018 Amount | Dec 31, 2018 Effective Rate | | :-------------------------------- | :------------------ | :-------------------------- | :------------------ | :-------------------------- | | First Lien Term Loan | $1,950,200 | 4.55% | $1,970,100 | 5.27% | | Unamortized discount and debt issuance costs | $(36,894) | | $(46,128) | | | **Total debt** | **$1,913,306** | | **$1,923,972** | | | Less: Current portion of long-term debt | $(19,900) | | $(19,900) | | | **Total long-term debt** | **$1,893,406** | | **$1,904,072** | | - The Senior Secured First Lien Credit Facilities include a **$1.99 billion First Lien Term Loan** (maturing **Feb 5, 2024**) and a **$125.0 million revolving credit facility**[553](index=553&type=chunk) - Borrowings under the First Lien Term Loan require equal quarterly repayments of **0.25%** of the original principal amount[549](index=549&type=chunk) Future Minimum Principal Payments Under First Lien Term Loan (as of Dec 31, 2019, in thousands) | Year | Amount | | :--- | :------- | | 2020 | $19,900 | | 2021 | $19,900 | | 2022 | $19,900 | | 2023 | $19,900 | | 2024 | $1,870,600 | | **Total minimum principal payments** | **$1,950,200** | - The **$315.0 million Second Lien Credit Facility** was fully repaid in **October 2018** using net proceeds from the IPO, resulting in a **$19.5 million loss on debt extinguishment**[556](index=556&type=chunk)[557](index=557&type=chunk) [Note 10. Redeemable Convertible Class A Common Stock](index=128&type=section&id=10.%20Redeemable%20Convertible%20Class%20A%20Common%20Stock) This note explains the conversion of SolarWinds' Redeemable Convertible Class A Common Stock into common stock upon the October 2018 IPO, including conversion price and recognized gain - Prior to the IPO in **October 2018**, Class A Common Stock accrued dividends at **9% per annum** and had a liquidation preference of **$1,000 per share** plus accrued dividends[558](index=558&type=chunk) - Upon IPO, each outstanding share of Class A Common Stock, along with **$717.4 million** of accrued and unpaid dividends, converted into common stock at a conversion price of **$19.00 per share**[559](index=559&type=chunk) - A **$711.2 million gain** related to the difference between the fair value of consideration transferred to Class A Common Stock shareholders and the carrying value was recognized upon conversion[559](index=559&type=chunk) [Note 11. Stockholders' Equity (Deficit) and Stock-Based Compensation](index=128&type=section&id=11.%20Stockholders%27%20Equity%20%28Deficit%29%20and%20Stock-Based%20Compensation) This note details SolarWinds' stock structure, equity incentive plans, and stock-based compensation expense, summarizing activity for various equity awards and the ESPP - SolarWinds has authorized **1,000,000,000 shares of common stock** and **50,000,000 shares of preferred stock**, each common share entitling the holder to one vote[560](index=560&type=chunk) - The 2016 Equity Incentive Plan, which terminated for future grants after the IPO, had **2,105,825 stock options** and **3,016,225 shares of restricted common stock** outstanding as of December 31, 2019[561](index=561&type=chunk)[566](index=566&type=chunk) - The 2018 Equity Incentive Plan, adopted in **October 2018**, reserved **30,000,000 shares** for various awards, with **6,118,177 restricted stock units (RSUs)** and **1,004,026 performance stock units (PSUs)** outstanding as of December 31, 2019[567](index=567&type=chunk) Stock-Based Compensation Expense (in thousands) | Year Ended Dec 31, | Amount | | :----------------- | :------- | | 2019 | $34,395 | | 2018 | $5,833 | | 2017 | Immaterial | - Unrecognized stock-based compensation expense as of December 31, 2019, was approximately **$1.1 million** for stock options (over **2.4 years**), **$94.3 million** for RSUs (over **3.0 years**), and **$4.9 million** for PSUs (over **1.4 years**)[573](index=573&type=chunk)[578](index=578&type=chunk)[579](index=579&type=chunk) - The 2018 Employee Stock Purchase Plan (ESPP) allows eligible participants to purchase common stock at **85% of the lesser** of the fair market value on the first or last day of the offering period[581](index=581&type=chunk)[582](index=582&type=chunk) [Note 12. Net Income (Loss) Per Share](index=135&type=section&id=12.%20Net%20Income%20%28Loss%29%20Per%20Share) This note reconciles net income (loss) to common stockholders and weighted-average shares for basic and diluted EPS, applying the two-class method and listing anti-dilutive equivalents Basic Net Earnings (Loss) Per Share Reconciliation (in thousands, except per share) | Metric | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :------------------------------------------ | :---------------------- | :---------------------- | :---------------------- | | Net income (loss) | $18,642 | $(102,066) | $(83,866) | | Accretion of dividends on Class A common stock | $0 | $(231,549) | $(268,007) | | Gain on conversion of Class A common stock | $0 | $711,247 | $0 | | Earnings allocated to unvested restricted stock | $(201) | $(12,997) | $0 | | **Net income (loss) available to common stockholders** | **$18,441** | **$364,635** | **$(351,873)** | | Weighted-average common shares outstanding (basic) | 306,768 | 140,301 | 100,433 | | **Basic earnings (loss) per share** | **$0.06** | **$2.60** | **$(3.50)** | Diluted Net Earnings (Loss) Per Share Reconciliation (in thousands, except per share) | Metric | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :------------------------------------------ | :---------------------- | :---------------------- | :---------------------- | | Net income (loss) available to common stockholders | $18,441 | $364,635 | $(351,873) | | Weighted-average shares used in computing basic net earnings (loss) per share | 306,768 | 140,301 | 100,433 | | Add stock-based incentive stock awards | 4,400 | 2,240 | $0 | | **Weighted-average shares used in computing diluted net earnings (loss) per share** | **311,168** | **142,541** | **100,433** | | **Diluted earnings (loss) per share** | **$0.06** | **$2.56** | **$(3.50)** | Anti-Dilutive Shares Excluded from Diluted EPS (in thousands) | Category | 2019 | 2018 | 2017 | | :------------------------------------------ | :----- | :----- | :----- | | Stock options to purchase common stock | 303 | 524 | 1,635 | | Performance-based stock options to purchase common stock | 86 | 119 | 105 | | Non-vested restricted stock incentive awards | 2,353 | 3,442 | 3,565 | | Performance-based non-vested restricted stock incentive awards | 998 | 1,559 | 2,527 | | Restricted stock units | 4,959 | 1,139 | 0 | | Performance stock units | 639 | 175 | 0 | | Employee stock purchase plan | 89 | 0 | 0 | | **Total anti-dilutive shares** | **9,427** | **6,958** | **7,832** | [Note 13. Employee Benefit Plans](index=137&type=section&id=13.%20Employee%20Benefit%20Plans) This note describes SolarWinds' 401(k) matching program for eligible employees, noting the company's contributions to the plan - SolarWinds maintains a **401(k) matching program** for all eligible employees, who are fully vested in all contributions[588](index=588&type=chunk) Employee Benefit Plan Expense (in thousands) | Year Ended Dec 31, | Amount | | :----------------- | :------- | | 2019 | $5,009 | | 2018 | $4,474 | | 2017 | $4,299 | [Note 14. Related Party Transactions](index=137&type=section&id=14.%20Related%20Party%20Transactions) This note details the Management Fee Agreement with Silver Lake Management, Thoma Bravo, and TB Partners, terminated upon the October 2018 IPO - SolarWinds entered into a Management Fee Agreement on **February 5, 2016**, with Silver

[PART I - FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) This section details the company's unaudited financial statements, management's analysis, market risks, and internal controls [Financial Statements](index=4&type=page&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2019, reflecting the adoption of ASC 606 Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $221,060 | $382,620 | | Goodwill | $3,929,602 | $3,683,961 | | Total Assets | $5,156,076 | $5,194,649 | | Total Current Liabilities | $390,265 | $368,102 | | Long-term debt, net | $1,896,062 | $1,904,072 | | Total Liabilities | $2,562,517 | $2,578,549 | | Total Stockholders' Equity | $2,593,559 | $2,616,100 | Condensed Consolidated Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended Sep 30, 2019 (in thousands) | Three Months Ended Sep 30, 2018 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $240,490 | $213,277 | $685,030 | $611,908 | | Gross Profit | $175,704 | $151,420 | $494,910 | $427,170 | | Operating Income | $34,419 | $35,116 | $94,544 | $79,211 | | Net Income (Loss) | $4,393 | $(398) | $5,419 | $(87,323) | | Diluted EPS | $0.01 | $(0.73) | $0.02 | $(2.98) | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Cash Flow Activity | Nine Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $216,846 | $166,082 | | Net cash used in investing activities | $(359,537) | $(64,739) | | Net cash used in financing activities | $(13,805) | $(97,287) | | Net (decrease) increase in cash | $(161,560) | $617 | [Notes to Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes detail significant accounting policies, including ASC 606 adoption, the $342.1 million Samanage acquisition, debt structure, and the increased effective tax rate - On January 1, 2019, the company adopted the new revenue recognition standard, ASC 606, using the modified-retrospective method, which changed the timing and classification of revenue and required the capitalization and amortization of certain sales commissions[34](index=34&type=chunk)[40](index=40&type=chunk) - On April 30, 2019, the company acquired Samanage Ltd., an IT service desk solution company, for approximately **$342.1 million**, funded by cash and **$35.0 million** in borrowings, adding the SolarWinds Service Desk to its portfolio[68](index=68&type=chunk)[69](index=69&type=chunk) Debt Summary | Debt Component | September 30, 2019 (in thousands) | Effective Rate | | :--- | :--- | :--- | | First Lien Term Loan | $1,955,175 | 4.79% | | Total Debt | $1,915,962 | - | - The effective tax rate for the nine months ended September 30, 2019, was **55.1%**, a significant increase from **18.7%** in the prior-year period, primarily due to a full valuation allowance against deferred tax assets from the Samanage acquisition[96](index=96&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=34&type=page&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's Q3 2019 performance, highlighting a **12.8% revenue increase**, the Samanage acquisition, rising operating expenses, and strong non-GAAP profitability with **$115.0 million Adjusted EBITDA** [Results of Operations](index=38&type=section&id=Results%20of%20Operations) Q3 2019 saw total revenue increase **12.8% to $240.5 million**, driven by **22.8% subscription growth** and **11.7% maintenance growth**, while operating expenses rose **21.5%** due to personnel and acquisition costs Revenue Comparison (Three Months Ended September 30) | Revenue Type | 2019 (in thousands) | 2018 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Subscription | $83,122 | $67,713 | 22.8% | | Maintenance | $113,755 | $101,817 | 11.7% | | **Total Recurring** | **$196,877** | **$169,530** | **16.1%** | | License | $43,613 | $43,747 | (0.3%) | | **Total Revenue** | **$240,490** | **$213,277** | **12.8%** | - The maintenance renewal rate was approximately **95%** for the trailing twelve-month period ended September 30, 2019[125](index=125&type=chunk) - Sales and marketing expenses increased by **$11.4 million (20.0%)** in Q3 2019 versus Q3 2018, driven by a **$6.1 million** increase in personnel costs (including **$2.6 million** in stock-based compensation) and a **$4.1 million** increase in marketing program costs[128](index=128&type=chunk) - Interest expense decreased by **$8.2 million (23.0%)** in Q3 2019 compared to Q3 2018, primarily due to the repayment of the **$315.0 million** second lien term loan in October 2018[133](index=133&type=chunk) [Non-GAAP Financial Measures](index=50&type=section&id=Non-GAAP%20Financial%20Measures) The company utilizes non-GAAP measures, reporting Q3 2019 non-GAAP total revenue of **$242.7 million**, non-GAAP operating income of **$111.0 million (45.7% margin)**, and Adjusted EBITDA of **$115.0 million (47.4% margin)** Reconciliation of Net Income to Adjusted EBITDA (Three Months Ended Sep 30) | Metric | 2019 (in thousands) | 2018 (in thousands) | | :--- | :--- | :--- | | Net income (loss) | $4,393 | $(398) | | Amortization and depreciation | $66,647 | $64,289 | | Interest expense, net | $27,418 | $35,627 | | Stock-based compensation & related taxes | $8,889 | $160 | | **Adjusted EBITDA** | **$115,030** | **$106,482** | | **Adjusted EBITDA Margin** | **47.4%** | **49.8%** | Reconciliation of GAAP to Non-GAAP Operating Income (Three Months Ended Sep 30) | Metric | 2019 (in thousands) | 2018 (in thousands) | | :--- | :--- | :--- | | GAAP operating income | $34,419 | $35,116 | | Amortization of acquired tech/intangibles | $62,187 | $60,342 | | Stock-based compensation & related taxes | $8,889 | $160 | | **Non-GAAP operating income** | **$110,996** | **$102,241** | | **Non-GAAP operating margin** | **45.7%** | **47.8%** | [Liquidity and Capital Resources](index=53&type=section&id=Liquidity%20and%20Capital%20Resources) As of September 30, 2019, the company held **$221.1 million in cash**, with **$216.8 million cash from operations** for the nine months, and **$2.0 billion total indebtedness**, maintaining sufficient liquidity - Cash and cash equivalents were **$221.1 million** as of September 30, 2019[167](index=167&type=chunk) - The Samanage acquisition was funded with cash on hand and **$35.0 million** of borrowings under the Revolving Credit Facility, which was subsequently repaid[170](index=170&type=chunk) Summary of Cash Flows (Nine Months Ended September 30) | Cash Flow Activity | 2019 (in thousands) | 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $216,846 | $166,082 | | Net cash used in investing activities | $(359,537) | $(64,739) | | Net cash used in financing activities | $(13,805) | $(97,287) | [Quantitative and Qualitative Disclosures of Market Risk](index=59&type=page&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20of%20Market%20Risk) The company faces interest rate risk from **$2.0 billion variable-rate debt**, with a **100 basis point increase** raising annual interest expense by **$19.7 million**, and foreign currency risk from global operations - The company has **$2.0 billion** in variable-rate debt, where a hypothetical **100 basis point increase** in interest rates would result in an approximate **$19.7 million** annual increase in interest expense[202](index=202&type=chunk) - The company is exposed to foreign currency exchange risk, primarily from fluctuations in the Euro, British Pound Sterling, and Australian Dollar against the USD[204](index=204&type=chunk) - As of July 1, 2018, a foreign currency denominated intercompany loan was designated as long-term, with subsequent remeasurement gains and losses recognized in accumulated other comprehensive income (loss) rather than net income[206](index=206&type=chunk)[208](index=208&type=chunk) [Controls and Procedures](index=61&type=page&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal control over financial reporting during Q3 2019 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[214](index=214&type=chunk) - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, internal controls[215](index=215&type=chunk) [PART II - OTHER INFORMATION](index=63&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity security sales, and exhibits [Legal Proceedings](index=63&type=page&id=Item%201.%20Legal%20Proceedings) The company is not currently a party to any material legal proceedings, and expects no material adverse impact from ordinary course claims - The company is not a party to, and its property is not the subject of, any material legal proceeding[217](index=217&type=chunk) [Risk Factors](index=63&type=page&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018 - There have been no material changes from the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018[218](index=218&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=63&type=page&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q3 2019, the company repurchased **212,400 shares** of unvested employee-held restricted stock, not as part of a public buyback program Issuer Purchases of Equity Securities (Q3 2019) | Period | Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 1-31, 2019 | — | $ — | | August 1-31, 2019 | — | $ — | | September 1-30, 2019 | 212,400 | $0.27 | - All repurchases relate to the company exercising its right to repurchase unvested employee-held restricted stock and were not part of a publicly announced plan[219](index=219&type=chunk) [Exhibits](index=63&type=page&id=Item%206.%20Exhibits) This section indexes exhibits filed with the Form 10-Q, including corporate documents and required CEO/CFO certifications - The report includes key corporate documents and required CEO/CFO certifications as exhibits[221](index=221&type=chunk)