solarwinds(SWI) - 2024 Q2 - Quarterly Report

FORM 10-Q Filing Information This section details the filing specifics of SolarWinds Corporation's Quarterly Report on Form 10-Q for the period ended June 30, 2024 - SolarWinds Corporation filed a Quarterly Report on Form 10-Q for the period ended June 30, 2024[1] - The registrant is an accelerated filer, with 169,407,013 shares of common stock outstanding as of July 30, 2024[1] Table of Contents This section provides an organized listing of all chapters and sub-sections contained within the report Safe Harbor Cautionary Statement This statement outlines forward-looking statements and key risk factors that may cause actual results to differ materially - This report contains forward-looking statements subject to known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially[4] - Key risk factors include litigation and investigation risks related to the Cyber Incident, other cybersecurity risks, shifts in sales motion (subscription-first), investments in observability, revenue mix changes, risks related to using AI, macroeconomic conditions, and competition[4][6] PART I - FINANCIAL INFORMATION This section presents the core financial data, including statements, notes, and management's analysis of operations and financial condition Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for SolarWinds Corporation, including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, along with accompanying notes for the periods ended June 30, 2024 and 2023 Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheets Data | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :--------------------------- | :----------------------------- | | Cash and cash equivalents | $158,845 | $284,695 | | Total current assets | $282,834 | $421,327 | | Total assets | $3,058,687 | $3,250,915 | | Total current liabilities | $454,835 | $468,808 | | Total liabilities | $1,753,378 | $1,808,871 | | Total stockholders' equity | $1,305,309 | $1,442,044 | Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net income (loss) over specific reporting periods Condensed Consolidated Statements of Operations Data | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | | :----------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Total revenue | $193,250 | $185,034 | $386,561 | $371,010 | | Gross profit | $173,002 | $163,076 | $345,477 | $327,222 | | Operating income | $49,486 | $32,645 | $96,385 | $68,478 | | Net income (loss) | $11,104 | $260 | $26,663 | $(5,361) | | Basic income (loss) per share | $0.07 | $— | $0.16 | $(0.03) | | Diluted income (loss) per share | $0.06 | $— | $0.15 | $(0.03) | Condensed Consolidated Statements of Comprehensive Income (Loss) This statement presents net income (loss) and other comprehensive income (loss) components for the reporting periods Condensed Consolidated Statements of Comprehensive Income (Loss) Data | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net income (loss) | $11,104 | $260 | $26,663 | $(5,361) | | Foreign currency translation adjustment | $(4,864) | $(2,950) | $(20,664) | $7,433 | | Other comprehensive income (loss) | $(4,864) | $(2,913) | $(20,664) | $7,553 | | Comprehensive income (loss) | $6,240 | $(2,653) | $5,999 | $2,192 | Condensed Consolidated Statements of Stockholders' Equity This statement outlines changes in the company's equity accounts, including common stock, additional paid-in capital, and accumulated deficit Condensed Consolidated Statements of Stockholders' Equity Data | Metric | Balance at Dec 31, 2023 (in thousands) | Balance at Jun 30, 2024 (in thousands) | | :---------------------------------------- | :------------------------------------- | :------------------------------------- | | Common Shares | 166,638 | 169,377 | | Common Stock Amount | $167 | $169 | | Additional Paid-in Capital | $2,688,854 | $2,546,118 | | Accumulated Other Comprehensive (Loss) | $(28,103) | $(48,767) | | Accumulated Deficit | $(1,218,874) | $(1,192,211) | | Total Stockholders' Equity | $1,442,044 | $1,305,309 | - A special cash dividend of $1.00 per share, totaling $168.2 million, was paid on April 15, 2024[15][25] Condensed Consolidated Statements of Cash Flows This statement categorizes cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Data | Metric | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | | :--------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net cash provided by operating activities | $73,394 | $49,767 | | Net cash provided by (used in) investing activities | $(17,121) | $17,857 | | Net cash used in financing activities | $(181,862) | $(11,457) | | Net increase (decrease) in cash and cash equivalents | $(125,850) | $55,456 | | Cash and cash equivalents, End of period | $158,845 | $177,194 | Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. Organization and Nature of Operations This note describes SolarWinds Corporation's business as a leading provider of observability and IT management software solutions - SolarWinds Corporation is a leading provider of simple, powerful, and secure observability and IT management software[23] - The company's solutions enable technology professionals to monitor and manage IT environments across on-premises, cloud, and hybrid deployments[23] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles, estimates, and pronouncements applied in preparing the financial statements Special Cash Dividend This policy details the declaration and payment of a special cash dividend to shareholders - A special cash dividend of $1.00 per share, totaling $168.2 million, was declared on March 15, 2024, and paid on April 15, 2024[25] Reclassifications This policy explains adjustments made to prior period financial statements for consistent presentation without impacting core financial results - Certain reclassifications were made to prior period condensed consolidated statements of cash flows to conform to current presentation, without impacting previously reported net income (loss), total assets, or net operating, investing, or financing cash flows[26] Use of Estimates This policy highlights management's reliance on significant estimates and assumptions in financial statement preparation - The preparation of financial statements requires management to make significant estimates and assumptions, particularly for goodwill, intangibles, long-lived assets, contingent consideration, revenue recognition, stock-based compensation, income taxes, and loss contingencies[27] Recently Issued Accounting Pronouncements This policy discusses the impact and effective dates of new accounting standards on the company's financial reporting - FASB ASU No. 2023-07 (Segment Reporting) requires enhanced disclosures starting in the Annual Report for FY2024, but no material impact is expected as the company operates as a single reportable segment[28][29] - FASB ASU No. 2023-09 (Income Taxes) expands disclosure requirements for income taxes, effective for fiscal years beginning after December 15, 2024, with no material impact expected[29] Fair Value Measurements (Accounting Policy) This policy describes the methodology for valuing financial and non-financial assets and liabilities using a three-tiered hierarchy - The company applies a three-tiered fair value hierarchy (Level 1, 2, 3) for financial and non-financial assets and liabilities, classifying all available-for-sale securities as valued using Level 2 inputs[30] Accumulated Other Comprehensive Income (Loss) This policy presents the components of accumulated other comprehensive income (loss), primarily foreign currency translation adjustments Accumulated Other Comprehensive Income (Loss) Data | Metric | Balance at Dec 31, 2023 (in thousands) | Balance at Jun 30, 2024 (in thousands) | | :--------------------------------------- | :------------------------------------- | :------------------------------------- | | Foreign Currency Translation Adjustments | $(28,103) | $(48,767) | | Net current period other comprehensive loss | N/A | $(20,664) | Disaggregation of Revenue This policy provides a breakdown of revenue recognized at a point in time versus over time Disaggregation of Revenue Data | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | | :----------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Revenue recognized at a point in time | $43,314 | $34,636 | $86,943 | $72,627 | | Revenue recognized over time | $149,936 | $150,398 | $299,618 | $298,383 | | Total revenue recognized | $193,250 | $185,034 | $386,561 | $371,010 | Deferred Revenue This policy details the company's deferred revenue balances and their expected recognition over future periods Deferred Revenue Balances | Metric | Balance at Dec 31, 2023 (in thousands) | Balance at Jun 30, 2024 (in thousands) | | :--------------------------- | :------------------------------------- | :------------------------------------- | | Total Deferred Revenue | $386,977 | $374,935 | - Approximately $100.0 million and $232.6 million of deferred revenue from December 31, 2023, was recognized during the three and six months ended June 30, 2024, respectively[34] Expected Recognition of Deferred Revenue | Expected recognition of deferred revenue | Total (in thousands) | Less than 1 year (in thousands) | 1-3 years (in thousands) | More than 3 years (in thousands) | | :--------------------------------------- | :------------------- | :------------------------------ | :----------------------- | :------------------------------- | | | $374,935 | $332,120 | $41,648 | $1,167 | Deferred Commissions This policy outlines the balances and classification of deferred sales commissions as current and non-current portions Deferred Commissions Data | Metric | Balance at Dec 31, 2023 (in thousands) | Balance at Jun 30, 2024 (in thousands) | | :--------------------------- | :------------------------------------- | :------------------------------------- | | Total deferred commissions | $23,563 | $23,528 | | Current portion | $7,926 | $8,210 | | Non-current portion | $15,637 | $15,318 | Cost of Revenue (Accounting Policy) This policy defines the components included in the cost of recurring revenue and amortization of acquired technologies - Cost of recurring revenue primarily includes technical support personnel costs, public cloud infrastructure and hosting fees, and amortization of capitalized software development costs[37][73] Amortization of Acquired Technologies | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | | :--------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Amortization of acquired license technologies | $923 | $924 | $1,846 | $1,846 | | Amortization of acquired subscription technologies | $844 | $2,501 | $2,585 | $5,015 | | Total amortization of acquired technologies | $1,767 | $3,425 | $4,431 | $6,861 | 3. Investments This note provides details on the company's short-term investments, primarily U.S. Treasury securities and commercial paper Short-Term Investments Data | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :--------------------------- | :--------------------------- | :----------------------------- | | U.S. Treasury securities | $7,950 | $3,980 | | Commercial paper | $2,755 | $497 | | Total short-term investments | $10,705 | $4,477 | - All short-term investments are classified as available-for-sale securities and are due in one year or less[38][39] 4. Goodwill This note presents the goodwill balance and the impact of foreign currency translation adjustments Goodwill Balances | Metric | Balance at Dec 31, 2023 (in thousands) | Balance at Jun 30, 2024 (in thousands) | | :--------------------------- | :------------------------------------- | :------------------------------------- | | Goodwill | $2,397,545 | $2,379,739 | | Foreign currency translation impact | N/A | $(17,806) | - Accumulated goodwill impairment was $893.0 million as of June 30, 2024, impacted by changes in foreign currency exchange rates[41] 5. Fair Value Measurements This note details the fair value hierarchy applied to various financial assets and liabilities Fair Value Measurements Data | Metric | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | Total (in thousands) | | :---------------------------------------- | :--------------------- | :--------------------- | :--------------------- | :------------------- | | June 30, 2024 | | | | | | Money market funds | $44,473 | $— | $— | $44,473 | | Commercial paper (cash equivalents) | $— | $28,052 | $— | $28,052 | | U.S. Treasury securities (short-term investments) | $— | $7,950 | $— | $7,950 | | Commercial paper (short-term investments) | $— | $2,755 | $— | $2,755 | | Total assets | $44,473 | $38,757 | $— | $83,230 | - The carrying value of long-term debt approximates its estimated fair value due to interest rate adjustments for market changes[44] - Fair value of non-financial assets (goodwill, intangible assets, property, plant and equipment) is measured on a non-recurring basis and classified as Level 3 due to significant unobservable inputs[44] 6. Debt This note describes the company's senior secured first lien credit facilities and related terms Senior Secured First Lien Credit Facilities This section details the terms, principal amounts, and effective rates of the company's primary debt instruments Senior Secured First Lien Credit Facilities Data | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :--------------------------------------- | :--------------------------- | :----------------------------- | | First Lien Term Loan (principal) | $1,235,662 | $1,235,662 | | Total debt | $1,207,772 | $1,203,384 | | Total long-term debt (net of current portion) | $1,195,415 | $1,190,934 | | Effective Rate (First Lien Term Loan) | 8.59% | 9.11% | - The Credit Agreement includes a $1.236 billion First Lien Term Loan (due Feb 2027, extended to Feb 2030 on July 24, 2024) and a $130.0 million revolving credit facility (extended to July 24, 2029 on July 24, 2024)[46][48] - Amendment No. 7 (Jan 2024) refinanced term loans and decreased the applicable margin for SOFR borrowings. Amendment No. 8 (July 2024) further extended maturities and decreased the applicable margin for SOFR borrowings from 3.25% to 2.75%[46][48] - The company was in compliance with all covenants of the Credit Agreement as of June 30, 2024[48] 7. Earnings (Loss) Per Share This note provides the calculation of basic and diluted earnings (loss) per share, including weighted-average shares outstanding Earnings (Loss) Per Share Data | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | | :------------------------------------------------------------------ | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Weighted-average shares used in computing basic income (loss) per share | 168,768 | 164,193 | 168,093 | 163,487 | | Add dilutive impact of employee equity plans | 3,794 | 1,193 | 4,016 | — | | Weighted-average shares used in computing diluted income (loss) per share | 172,562 | 165,386 | 172,109 | 163,487 | - Weighted-average outstanding shares of common stock equivalents excluded from diluted EPS computation due to anti-dilutive effect were 6,637k for the three months and 2,112k for the six months ended June 30, 2024[51] 8. Income Taxes This note details the company's income tax expense, effective tax rates, and ongoing tax examinations Income Tax Expense and Effective Tax Rate | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Income tax expense (in thousands) | $10,274 | $2,955 | $14,835 | $15,739 | | Effective tax rate | 48.1% | 91.9% | 35.7% | 151.7% | - The decrease in effective tax rates for both periods was primarily due to the impact of valuation allowances and an increase in foreign income before income taxes[54] - The company is currently under examination by the IRS (2013-2016), Texas Comptroller (2015-2020), and the Philippines Bureau of Internal Revenue (2022)[54] - The company does not expect to be subject to the OECD's Pillar Two global minimum tax rules this fiscal year[54] 9. Commitments and Contingencies This note outlines potential future obligations and liabilities, including those related to the Cyber Incident and other legal matters Cyber Incident (Contingencies) This section describes the cyberattack on the company's systems and its ongoing implications - The company was the victim of a cyberattack on its Orion Software Platform and internal systems, referred to as the Cyber Incident[55] Expenses Incurred (Cyber Incident) This section details the gross and net expenses incurred due to the Cyber Incident, including insurance proceeds Cyber Incident Related Expenses | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | | :---------------------------------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Gross expenses related to the Cyber Incident | $2,104 | $5,580 | $5,109 | $7,608 | | Less: proceeds received or expected to be received under insurance | $— | $(5,000) | $— | $(14,798) | | Total net expenses (proceeds) related to the Cyber Incident | $2,104 | $580 | $5,109 | $(7,190) | Litigation, Claims and Government Investigations This section provides updates on legal actions, including class action lawsuits, derivative actions, and SEC investigations related to the Cyber Incident - A securities class action lawsuit related to the Cyber Incident was settled for $26 million in March 2023, fully reimbursed by directors' and officers' liability insurance[56][57] - Shareholder derivative actions related to the Cyber Incident were dismissed in both Delaware and Texas courts[57] - The SEC filed a civil complaint on October 30, 2023; a motion to dismiss was largely granted on July 18, 2024, with only one claim concerning the accuracy of the online Security Statement remaining[57] Insurance Coverage This section outlines the company's cybersecurity and directors and officers liability insurance coverage for Cyber Incident-related losses - The company maintains $15 million in cybersecurity insurance and $50 million in directors and officers liability insurance, with all proceeds related to Cyber Incident losses already received[57] Indemnification This section describes the company's obligation to indemnify N-able for certain Cyber Incident-related liabilities - SolarWinds is obligated to indemnify N-able for liabilities related to the Cyber Incident, excluding certain specified expenses, with the amount currently undeterminable and not recorded[58] Other Matters (Contingencies) This section addresses other routine litigation not expected to materially impact the company's financial position - Other litigation arising from the normal course of business is not expected to have a material adverse effect on the company's consolidated financial condition, results of operations, or cash flows[59] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, and future outlook, including discussions of revenue trends, expenses, liquidity, and the impact of macroeconomic factors and the Cyber Incident Overview This section introduces SolarWinds as a leading provider of observability and IT management software, emphasizing its 'subscription-first' strategy - SolarWinds is a leading provider of simple, powerful, and secure observability and IT management software, offering full-stack solutions for modern, distributed, and hybrid network environments[62] - The company is transitioning to a 'subscription-first' approach to grow subscription revenue over perpetual licenses[62] Impacts of Macroeconomic Conditions This section discusses how global economic factors, such as inflation and interest rates, could affect the company's revenue and borrowing costs - Global macroeconomic conditions (e.g., wars, inflation, interest rates) could negatively impact revenue through deferred renewals or subscription cancellations[63] - Borrowings under the credit agreement bear variable interest rates, which may fluctuate with changes in market rates[63] Cyber Incident (MD&A) This section addresses the ongoing financial and operational impacts of the Cyber Incident, including legal costs and security initiatives - The company expects to continue incurring significant legal and other professional services costs related to the Cyber Incident, with applicable insurance coverage now exhausted[64] - The 'Secure by Design' initiative involves implementing enhanced security practices, with associated costs included in ongoing research and development and general and administrative expenses[66] Second Quarter Highlights This section summarizes key events and appointments during the second quarter, including changes in executive leadership - Lewis Black was appointed Executive Vice President, Chief Financial Officer, effective August 2024, succeeding J. Barton Kalsu[67] Annual Recurring Revenue (ARR) This section provides key metrics on the company's annual recurring revenue, disaggregated by subscription and total ARR Annual Recurring Revenue (ARR) Data | Metric | As of June 30, 2024 (in thousands) | As of June 30, 2023 (in thousands) | Year-over-Year Growth | | :------------------- | :------------------------------- | :------------------------------- | :-------------------- | | Subscription ARR | $269,886 | $197,725 | 36.5% | | Total ARR | $704,722 | $657,104 | 7.2% | - The year-over-year growth in Subscription ARR was primarily driven by sales of time-based subscription offerings and customer transitions to subscription products[69] Customers This section presents data on the number of customers with significant annual recurring revenue and changes in customer aggregation methodology Customers with Total ARR > $100,000 | Metric | As of June 30, 2024 | As of June 30, 2023 | | :------------------------------------ | :------------------ | :------------------ | | Customers with Total ARR > $100,000 | 1,042 | 902 | - The company now aggregates individual purchasers into single customer profiles of parent entities by region for this metric[70] Components of Our Results of Operations This section explains the various elements contributing to the company's financial performance, including revenue, cost of revenue, and operating expenses Revenue (Components) This section defines the types of revenue, including recurring and perpetual license, and the impact of the 'subscription-first' strategy - Revenue consists of recurring revenue (subscription and maintenance) and perpetual license revenue[72] - Subscription revenue is derived from SaaS and time-based offerings, recognized ratably or upfront[72] - The company's 'subscription-first' approach is expected to shift revenue mix, with license sales and maintenance renewals potentially declining[72] Cost of Revenue (Components) This section details the components of cost of recurring revenue and amortization of acquired technologies - Cost of recurring revenue includes technical support, public cloud infrastructure, hosting fees, and amortization of capitalized software development costs[73] - Amortization of acquired technologies relates to capitalized costs of licensed products and subscription offerings[74] Operating Expenses (Components) This section outlines the primary drivers of operating expenses, including personnel costs, R&D, and G&A, and expected trends - Personnel costs are the most significant component of operating expenses, with total employees at 2,073 as of June 30, 2024 (down from 2,129 in 2023)[75] - Operating expenses are expected to increase in absolute dollars due to investments in product development, enterprise customer selling efforts, and market expansion[75] - Research and development expenses now include costs related to the product management organization, previously in sales and marketing[75] - General and administrative expenses include certain Cyber Incident costs, which are expected to continue[75] Interest Expense, Net (Components) This section describes the components of net interest expense and its sensitivity to variable interest rates - Interest expense, net, consists of interest paid and accrued on debt and amortization of debt costs, offset by interest income, and is expected to fluctuate due to variable interest rates[76] Other Income (Expense), Net (Components) This section explains the nature of other income and expense, primarily foreign currency gains and losses - Other income (expense), net, primarily consists of gains (losses) from changes in foreign currency exchange rates and other non-operating income (expense)[78] Foreign Currency (Components) This section discusses the company's exposure to foreign currency exchange rate fluctuations and their impact on financial results - The company faces exposure to adverse movements in foreign currency exchange rates, particularly for the Euro, British Pound Sterling, and Australian Dollar against the USD, impacting revenue, operating expenses, and balance sheet accounts[79] Income Tax Expense (Benefit) (Components) This section explains the factors influencing the company's income tax expense and effective tax rate - Income tax expense (benefit) consists of domestic and foreign corporate income taxes, with the effective tax rate influenced by changes in domestic and foreign earnings, tax laws, and valuation allowances[80] Comparison of the Three Months Ended June 30, 2024 and 2023 This section provides a detailed comparative analysis of the company's financial performance for the three-month periods ended June 30, 2024 and 2023 Revenue (3 Months) This section compares revenue performance for the three months, highlighting changes in subscription, maintenance, and license revenue Revenue Comparison (3 Months) | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | Change (in thousands) | % Change | | :------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :------- | | Subscription | $70,033 | $53,389 | $16,644 | 31.2% | | Maintenance | $110,306 | $116,056 | $(5,750) | (5.0)% | | Total recurring revenue | $180,339 | $169,445 | $10,894 | 6.4% | | License | $12,911 | $15,589 | $(2,678) | (17.2)% | | Total revenue | $193,250 | $185,034 | $8,216 | 4.4% | - Subscription net retention rate was 97% for both the three months ended June 30, 2024 and 2023[84] - Maintenance renewal rate increased to 97% for the trailing twelve months ended June 30, 2024, from 94% in the prior year[86] Cost of Revenue (3 Months) This section compares the cost of revenue for the three months, focusing on recurring revenue costs and amortization Cost of Revenue Comparison (3 Months) | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :---------------------------------------- | :---------------------------------------- | :-------------------- | :------- | | Cost of recurring revenue | $18,481 | $18,533 | $(52) | (0.3)% | | Amortization of acquired technologies | $1,767 | $3,425 | $(1,658) | (48.4)% | | Total cost of revenue | $20,248 | $21,958 | $(1,710) | (7.8)% | - The decrease in total cost of revenue was primarily due to a decrease in amortization expense as certain intangible assets became fully amortized[87] Operating Expenses (3 Months) This section compares operating expenses for the three months, including sales and marketing, R&D, and G&A Operating Expenses Comparison (3 Months) | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | Change (in thousands) | % Change | | :----------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :----------------------- | | Sales and marketing | $55,304 | $59,838 | $(4,534) | (7.6)% | | Research and development | $26,399 | $24,081 | $2,318 | 9.6% | | General and administrative | $30,321 | $34,418 | $(4,097) | (11.9)% | | Amortization of acquired intangibles | $11,492 | $12,094 | $(602) | (5.0)% | | Total operating expenses | $123,516 | $130,431 | $(6,915) | (5.3)% | - Sales and marketing expenses decreased due to a $2.9 million shift of product management organization expenses to R&D and lower marketing program costs[89] - Research and development expenses increased by $3.0 million due to departmental structure changes and higher hosting fees[89] - General and administrative expenses decreased due to lower restructuring charges ($5.9 million), partially offset by a $1.5 million increase in Cyber Incident costs (net of insurance recovery)[89] Interest Expense, Net (3 Months) This section compares net interest expense for the three months, noting changes in effective interest rates and debt margins Interest Expense, Net Comparison (3 Months) | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | Change (in thousands) | % Change | | :-------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :------- | | Interest expense, net | $(28,047) | $(29,443) | $1,396 | (4.7)% | | Weighted-average effective interest rate on debt | 8.6% | 8.9% | (0.3)% | N/A | - The decrease in net interest expense was primarily due to lower applicable margins on outstanding debt from the January 2024 refinancing, partially offset by increases in interest rates[90] Other Income (Expense), Net (3 Months) This section compares other income (expense), net, for the three months, primarily due to foreign currency impacts Other Income (Expense), Net Comparison (3 Months) | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | Change (in thousands) | | :-------------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | | Other income (expense), net | $(61) | $13 | $(74) | - The decrease in other income (expense), net, was primarily due to a decrease in other income and the impact of changes in exchange rates on foreign currency denominated accounts[92] Income Tax Expense (3 Months) This section compares income tax expense and effective tax rates for the three months, explaining key drivers of change Income Tax Expense Comparison (3 Months) | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | Change (in thousands) | % Change | | :--------------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :------- | | Income tax expense | $10,274 | $2,955 | $7,319 | 247.7% | | Effective tax rate | 48.1% | 91.9% | (43.8)% | N/A | - The effective tax rate decreased to 48.1% primarily due to the impact of valuation allowances and an increase in foreign income before income taxes[93] Comparison of the Six Months Ended June 30, 2024 and 2023 This section provides a detailed comparative analysis of the company's financial performance for the six-month periods ended June 30, 2024 and 2023 Revenue (6 Months) This section compares revenue performance for the six months, highlighting changes in subscription, maintenance, and license revenue Revenue Comparison (6 Months) | Metric | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | Change (in thousands) | % Change | | :------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :------- | | Subscription | $138,790 | $107,746 | $31,044 | 28.8% | | Maintenance | $222,026 | $230,534 | $(8,508) | (3.7)% | | Total recurring revenue | $360,816 | $338,280 | $22,536 | 6.7% | | License | $25,745 | $32,730 | $(6,985) | (21.3)% | | Total revenue | $386,561 | $371,010 | $15,551 | 4.2% | - Subscription net retention rate was 97% for both the six months ended June 30, 2024 and 2023[97] - Maintenance renewal rate increased to 97% for the trailing twelve months ended June 30, 2024, from 94% in the prior year[98] Cost of Revenue (6 Months) This section compares the cost of revenue for the six months, focusing on recurring revenue costs and amortization Cost of Revenue Comparison (6 Months) | Metric | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :---------------------------------------- | :---------------------------------------- | :-------------------- | :------- | | Cost of recurring revenue | $36,653 | $36,927 | $(274) | (0.7)% | | Amortization of acquired technologies | $4,431 | $6,861 | $(2,430) | (35.4)% | | Total cost of revenue | $41,084 | $43,788 | $(2,704) | (6.2)% | - The decrease in total cost of revenue was primarily due to a decrease in amortization of acquired technologies as certain intangible assets became fully amortized[100] Operating Expenses (6 Months) This section compares operating expenses for the six months, including sales and marketing, R&D, and G&A Operating Expenses Comparison (6 Months) | Metric | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | Change (in thousands) | % Change | | :----------------------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :------- | | Sales and marketing | $110,225 | $125,754 | $(15,529) | (12.3)% | | Research and development | $54,227 | $47,872 | $6,355 | 13.3% | | General and administrative | $61,629 | $60,019 | $1,610 | 2.7% | | Amortization of acquired intangibles | $23,011 | $25,099 | $(2,088) | (8.3)% | | Total operating expenses | $249,092 | $258,744 | $(9,652) | (3.7)% | - Sales and marketing expenses decreased due to lower marketing program costs ($6.7 million) and a $6.3 million shift of product management organization expenses to R&D[101] - Research and development expenses increased by $6.5 million due to departmental structure changes and higher hosting fees[101] - General and administrative expenses increased due to a $12.3 million increase in Cyber Incident costs (net of a $14.8 million decrease in insurance proceeds), partially offset by lower restructuring charges ($11.8 million)[101] Interest Expense, Net (6 Months) This section compares net interest expense for the six months, noting changes in effective interest rates and debt margins Interest Expense, Net Comparison (6 Months) | Metric | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | Change (in thousands) | % Change | | :-------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :------- | | Interest expense, net | $(54,877) | $(58,024) | $3,147 | (5.4)% | | Weighted-average effective interest rate on debt | 8.6% | 8.7% | (0.1)% | N/A | - The decrease in net interest expense was primarily due to a $2.7 million increase in interest income and a $0.4 million decrease in interest expense from lower applicable margins due to debt refinancing[102] Other Income (Expense), Net (6 Months) This section compares other income (expense), net, for the six months, primarily due to foreign currency impacts Other Income (Expense), Net Comparison (6 Months) | Metric | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | Change (in thousands) | | :-------------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | | Other income (expense), net | $(10) | $(76) | $66 | - The increase in other income (expense), net, was primarily due to the impact of changes in exchange rates on foreign currency denominated accounts[104] Income Tax Expense (6 Months) This section compares income tax expense and effective tax rates for the six months, explaining key drivers of change Income Tax Expense Comparison (6 Months) | Metric | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | Change (in thousands) | % Change | | :--------------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :------- | | Income tax expense | $14,835 | $15,739 | $(904) | (5.7)% | | Effective tax rate | 35.7% | 151.7% | (116.0)% | N/A | - The effective tax rate decreased to 35.7% primarily due to the impact of valuation allowances, changes in reserves for uncertain tax positions, and an increase in foreign income before income taxes[105] Non-GAAP Financial Measures This section presents and reconciles non-GAAP financial measures, including operating income, operating margin, Adjusted EBITDA, and Adjusted EBITDA margin Non-GAAP Operating Income and Non-GAAP Operating Margin This section provides non-GAAP operating income and margin, excluding certain non-cash and non-recurring items Non-GAAP Operating Income and Margin | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | | :-------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | GAAP operating income | $49,486 | $32,645 | $96,385 | $68,478 | | Non-GAAP operating income | $87,161 | $74,591 | $173,852 | $147,266 | | GAAP operating margin | 25.6% | 17.6% | 24.9% | 18.5% | | Non-GAAP operating margin | 45.1% | 40.3% | 45.0% | 39.7% | - Non-GAAP operating income and margin exclude amortization of acquired intangible assets, stock-based compensation, acquisition and other costs, restructuring costs, and Cyber Incident costs (net of insurance)[108] Adjusted EBITDA and Adjusted EBITDA Margin This section presents Adjusted EBITDA and margin, excluding various non-cash and non-operating expenses Adjusted EBITDA and Margin | Metric | 3 Months Ended June 30, 2024 (in thousands) | 3 Months Ended June 30, 2023 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | | :------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net income (loss) | $11,104 | $260 | $26,663 | $(5,361) | | Adjusted EBITDA | $92,496 | $79,142 | $184,566 | $156,507 | | Adjusted EBITDA margin | 47.9% | 42.8% | 47.7% | 42.2% | - Adjusted EBITDA excludes amortization, depreciation, income tax, interest, foreign currency gains/losses, acquisition costs, debt-related costs, stock-based compensation, restructuring costs, and Cyber Incident costs (net)[111] Liquidity and Capital Resources This section analyzes the company's ability to generate and manage cash, including debt levels, cash flows, and contractual obligations Indebtedness This section details the company's total indebtedness and available capacity under its revolving credit facility - Total indebtedness was $1.2 billion as of June 30, 2024, with $130.0 million of available capacity under the revolving credit facility[115] First Lien Credit Agreement (Liquidity) This section describes the terms and recent amendments to the company's primary credit facilities impacting liquidity - The First Lien Credit Agreement includes a $1.236 billion First Lien Term Loan and a $130.0 million revolving credit facility[117] - Amendment No. 8 (July 2024) extended the Revolving Credit Facility maturity to July 24, 2029, and the First Lien Term Loan maturity to February 5, 2030, and decreased the applicable margin for SOFR borrowings[117] Summary of Cash Flows This section provides a high-level overview of cash flows from operating, investing, and financing activities Summary of Cash Flows Data | Metric | 6 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2023 (in thousands) | | :--------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net cash provided by operating activities | $73,394 | $49,767 | | Net cash provided by (used in) investing activities | $(17,121) | $17,857 | | Net cash used in financing activities | $(181,862) | $(11,457) | | Net increase (decrease) in cash and cash equivalents | $(125,850) | $55,456 | Operating Activities (Cash Flow) This section details cash generated or used by the company's core business operations - Net cash provided by operating activities increased by $23.6 million YoY, primarily due to increased operating income and decreased cash outflows from changes in operating assets and liabilities[119] - Cash flow from operating activities during the six months ended June 30, 2023, included a $26.0 million class action lawsuit settlement payment[119] Investing Activities (Cash Flow) This section details cash flows related to the purchase and sale of long-term assets and investments - Net cash used by investing activities increased by $35.0 million YoY, primarily due to the impact of purchases and maturities of short-term investments[121] Financing Activities (Cash Flow) This section details cash flows related to debt, equity, and dividend payments - Net cash used in financing activities increased significantly YoY, primarily due to the $168.2 million special cash dividend paid in April 2024[122] - No quarterly debt repayments were required during the six months ended June 30, 2024, due to the debt refinancing in January 2024[122] Contractual Obligations and Commitments This section summarizes the company's material contractual obligations and commitments - There have been no material changes in contractual obligations and commitments since December 31, 2023[123] Critical Accounting Policies and Estimates This section highlights key accounting policies requiring significant management judgment and estimation - Critical accounting policies include the valuation of goodwill, intangibles, revenue recognition, stock-based compensation, income taxes, and loss contingencies, with no material changes since the 2023 Annual Report on Form 10-K[124] Recent Accounting Pronouncements (MD&A) This section refers to the notes for details on recently issued accounting pronouncements - Refer to Note 2. Summary of Significant Accounting Policies for a full description of recent accounting pronouncements[125] Item 3. Quantitative and Qualitative Disclosures of Market Risk This section discusses the company's exposure to market risks, primarily interest rate risk on its variable-rate debt and foreign currency exchange risk from international operations, and the strategies used to manage these risks Interest Rate Risk This section assesses the potential impact of interest rate fluctuations on the company's variable-rate debt and interest expense - Cash and cash equivalents were $158.8 million and short-term investments were $10.7 million as of June 30, 2024[126] - Total indebtedness was $1.24 billion as of June 30, 2024, with borrowings bearing variable interest rates (8.59% annual rate)[126] - A hypothetical 100 basis point increase in interest rates would result in an approximate $12.4 million annual impact to interest expense[126] Foreign Currency Exchange Risk This section discusses the company's exposure to adverse movements in foreign currency exchange rates from international operations - The company is exposed to adverse movements in foreign currency exchange rates, particularly for the Euro, British Pound Sterling, and Australian Dollar against the USD[127] - Fluctuations in foreign currencies impact the USD-translated amounts of total assets, liabilities, revenue, operating expenses, and cash flows of foreign subsidiaries[127] Foreign Currency Transaction Risk This section explains risks arising from multi-currency transactions and the use of forward contracts to mitigate exposure - Foreign currency transaction risk arises from multi-currency maintenance contracts, subscriptions, accounts receivable, and intercompany transactions[130] - The company utilizes purchased foreign currency forward contracts to minimize foreign exchange exposure on certain foreign balance sheet positions[130] Foreign Currency Translation Risk This section describes how foreign currency fluctuations impact the USD-translated financial results of international subsidiaries - Fluctuations in foreign currencies impact the USD-translated amounts of assets, liabilities, revenue, operating expenses, and cash flows of foreign subsidiaries[131] - USD strengthening against foreign currencies results in reduced reported amounts for international operations, while USD weakening increases them[131] Item 4. Controls and Procedures This section addresses the effectiveness of the company's disclosure controls and procedures and reports on changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section reports on management's assessment of the effectiveness of the company's disclosure controls and procedures - 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 June 30, 2024[132] Changes in Internal Control over Financial Reporting This section discloses any material changes in the company's internal control over financial reporting during the quarter - There were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting during the quarter ended June 30, 2024[133] PART II - OTHER INFORMATION This section includes additional information not covered in the financial statements, such as legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings This section refers to the detailed discussion of Cyber Incident-related lawsuits and government investigations in Item 2 and Note 9, and states that other ordinary course litigation is not expected to have a material adverse effect - Legal proceedings and government investigations related to the Cyber Incident are incorporated by reference from Item 2 and Note 9[135] - Other litigation arising from the ordinary course of business is not expected to have a material adverse effect on the company's consolidated financial condition, results of operations, or cash flows[135] Item 1A. Risk Factors This section updates risk factors, specifically highlighting the ongoing and evolving risks related to cyberattacks, including the Cyber Incident, and the potential for significant harm to the business - The updated risk factor emphasizes ongoing and evolving risks from cyberattacks, including the Cyber Incident, which can lead to system compromises, data theft, operational interference, and legal liabilities[137] - Risks include sophisticated nation-state actors, human error, AI-created attacks, vulnerabilities in legacy products, and reliance on third-party software[137][138] - The company expects to continue incurring significant expenses related to its cybersecurity initiatives[138] Item 6. Exhibits This section provides a list of exhibits filed with the Form 10-Q, including corporate documents, employment agreements, and certifications - The exhibit index lists corporate documents (Certificate of Incorporation, Bylaws), employment agreements (Lewis Black, J. Barton Kalsu), and certifications (CEO, CFO)[140] Signatures This section contains the signature block, confirming the due authorization and filing of the report by the Chief Financial Officer - The report is signed by J. Barton Kalsu, Chief Financial Officer, on August 2, 2024[141]