solarwinds(SWI) - 2020 Q2 - Quarterly Report

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