solarwinds(SWI) - 2019 Q4 - Annual Report

Special Note Regarding Forward-Looking Statements 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][14] - 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] - 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] PART I Item 1. Business SolarWinds is a leading IT infrastructure management software provider, employing its "SolarWinds Model" to grow recurring revenue 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] - 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][18][20] - 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] The SolarWinds Model 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][28][30][32][34] - 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] - 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][31][65] - 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][33][66] Growth Strategies 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][36][37] - 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][39] - 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] Our Customers and Market 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][42] - 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][45] - Technology professionals are increasingly empowered in IT purchasing decisions, preferring to trial software and select products that address specific challenges[47] - 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][50] Product Portfolio and Technology Platforms 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] - Product development is guided by principles including purpose-building for technology professionals, community-driven roadmaps, ease of use, and integrated user experience[52] - 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][55][56][57] - 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][60] Marketing and Sales 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][62] - 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][64][65] - 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][67][68] - Software is also sold through distributors and resellers to expand global presence and reach various market segments, including government and commercial customers[69] Research and Development 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] - The software development process is responsive to customer needs, cost-efficient, and agile, involving close collaboration with the user community[71] - A low-cost global development model, utilizing small scrum teams and diverse labor markets, enables rapid, efficient, and cost-effective software releases[72][73] 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] - 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] - 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] Intellectual Property 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] - As of December 31, 2019, SolarWinds owned approximately 33 issued U.S. patents and 172 issued foreign patents, with 58 pending patent applications[75] - 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][76][77] 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] - The company considers its relationship with employees to be good and is not party to any collective bargaining agreement[78] Additional Information 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] - Additional filings are also available on the SEC's Internet site (http://www.sec.gov**)[79](index=79&type=chunk) Item 1A. Risk Factors 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][83][88][91] - 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][94] - 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][110][141][157] - 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][116][117] - 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][101][102] - 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][162][170][171][177][178][180][181] - 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][196][198] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[210] Item 2. Properties 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] - 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] - 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] Item 3. Legal Proceedings 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] - 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] Item 4. Mine Safety Disclosures This item is not applicable to SolarWinds Corporation - This item is not applicable[214] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - As of February 14, 2020, the last reported sales price of common stock was $18.57 per share, with 102 holders of record[217] - 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] 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] Item 6. Selected Consolidated Financial Data 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] - Effective January 1, 2019, SolarWinds adopted FASB ASC No. 2014-09 "Revenue from Contracts with Customers" (ASC 606) using the modified retrospective method[230] - 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] 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 This section discusses SolarWinds' business, financial highlights, revenue, expenses, liquidity, capital resources, and critical accounting policies 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][242] - The company's "SolarWinds Model" is focused on achieving both growth and profitability by delivering powerful, scalable, affordable, and easy-to-use products[241][243] Financial Highlights 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] 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][253] - 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][255] Components of Our Results of Operations 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] - 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] - Maintenance revenue comes from maintenance services associated with perpetual license products, recognized ratably over the contract period[256] - License revenue is from sales of perpetual licenses, recognized upon delivery of the electronic license key[256][258] - 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][264] - Other income (expense) primarily includes interest expense, gains/losses from foreign currency exchange rates on intercompany loans, and losses on extinguishment of debt[260] Comparison of the Years Ended December 31, 2019 and 2018 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] - 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][269] - Maintenance revenue increased 10.8% due to a growing customer base and strong renewal rates (94% in 2019, 95% in 2018)[270][271] 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] - 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][284] Non-GAAP Financial Measures 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][290] 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 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] - 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] - Total indebtedness was $2.0 billion as of December 31, 2019, with $125.0 million available for additional borrowing under revolving credit facilities[300] - 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][304] - The $315.0 million Second Lien Credit Facility was fully repaid in October 2018 using proceeds from the IPO[305][306] 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 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][319][322] - Revenue recognition (ASC 606) requires judgment in identifying distinct performance obligations and allocating transaction prices based on estimated standalone selling prices[323][324][325] - 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][327] - 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][329][331] Off-Balance Sheet Arrangements 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] Recent Accounting Pronouncements 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] Item 7A. Quantitative and Qualitative Disclosures About Market Risk 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] - A hypothetical 100 basis point increase in interest rates would result in an approximate $19.5 million increase in annual interest expense[338] - The company faces foreign currency exchange risk due to international business operations in multiple currencies (Euro, British Pound Sterling, Australian Dollar against USD)[340] - 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] Item 8. Financial Statements and Supplementary Data 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] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 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] Item 9A. Controls and Procedures 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][352] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[353][355] - 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][398] - 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] Item 9B. Other Information No other information was reported under this item - No other information was reported under this item[359] PART III Item 10. Directors, Executive Officers and Corporate Governance 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] - 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] Item 11. Executive Compensation 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] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] Item 13. Certain Relationships and Related Transactions, and Director Independence 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] Item 14. Principal Accountant Fees and Services 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] PART IV Item 15. Exhibits, Financial Statement Schedules 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] - Financial Statement Schedules include Schedule II—Valuation and Qualifying Accounts[372] - 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][375][376][378] Item 16. Form 10-K Summary The company did not provide a Form 10-K Summary - No Form 10-K Summary was provided[379] 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][386] Index to Consolidated Financial Statements 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] - It also includes Notes to Consolidated Financial Statements (Notes 1 through 18) and Schedule II - Valuation and Qualifying Accounts[389] Report of Independent Registered Public Accounting Firm 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][393] - 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] - 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][403][405][406] - 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] Notes to Consolidated Financial Statements Note 1. Organization and Nature of Operations 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] - The company was acquired in a "Take Private" transaction by affiliates of Silver Lake and Thoma Bravo in February 2016[429] - 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] - 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] Note 2. Summary of Significant Accounting Policies 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] - 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][445] - 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][453] - 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][455] - 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][457] 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 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] 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] 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][518][520] Note 4. Goodwill and Intangible Assets 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] Note 5. Fair Value Measurements 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] - 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] Note 6. Property and Equipment 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 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] - 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] 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] Note 8. Accrued Liabilities and Other 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 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] - Borrowings under the First Lien Term Loan require equal quarterly repayments of 0.25% of the original principal amount[549] 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][557] Note 10. Redeemable Convertible Class A Common Stock 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] - 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] - 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] Note 11. Stockholders' Equity (Deficit) and Stock-Based Compensation 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] - 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][566] - 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] 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][578][579] - 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][582] Note 12. Net Income (Loss) Per Share 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 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] 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 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