solarwinds(SWI) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section details the company's unaudited financial statements, management's analysis, market risks, and internal controls Financial Statements 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 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][40] - 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][69] 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] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) 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 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] - 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] - 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] Non-GAAP Financial Measures 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 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] - 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] 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 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] - 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] - 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][208] Controls and Procedures 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] - 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] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and exhibits Legal Proceedings 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] Risk Factors 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] Unregistered Sales of Equity Securities and Use of Proceeds 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] Exhibits 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]