solarwinds(SWI) - 2020 Q3 - Quarterly Report

Safe Harbor Cautionary Statement This section provides a cautionary statement regarding forward-looking information, outlining inherent risks and the company's policy on updating such statements Forward-Looking Statements and Risk Factors This section outlines the nature of forward-looking statements within the report, identifying common terms used and listing various known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially - Forward-looking statements are identified by terms such as "aim," "anticipate," "believe," "expect," "intend," "plan," "may," "will," and similar expressions[9] - Key factors that could cause actual results to differ include expectations regarding financial condition, product development, acquisitions, personnel hiring, international earnings, capital expenditures, the impact of the COVID-19 pandemic, sufficiency of cash, and the potential spin-off of the MSP business[10] - The company assumes no obligation to publicly update these forward-looking statements, except as required by law[11] PART I - FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements This section provides the unaudited condensed consolidated financial statements of SolarWinds Corporation, including the balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, for the periods ended September 30, 2020, and December 31, 2019 (for balance sheet) or September 30, 2019 (for income statements and cash flows), along with integral notes Condensed Consolidated Balance Sheets This statement presents the company's financial position, detailing assets, liabilities, and stockholders' equity as of December 31, 2019, and September 30, 2020 Condensed Consolidated Balance Sheets (in thousands) | Metric | Dec 31, 2019 (in thousands) | Sep 30, 2020 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total assets | 5,449,999 | 5,310,742 | (139,257) | | Total liabilities | 2,667,571 | 2,661,220 | (6,351) | | Total stockholders' equity | 2,649,522 | 2,782,428 | 132,906 | | Cash and cash equivalents | 173,372 | 424,986 | 251,614 | | Goodwill | 4,058,198 | 4,108,746 | 50,548 | | Long-term debt, net | 1,893,406 | 1,885,352 | (8,054) | Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net income for the three and nine months ended September 30, 2020, and 2019 Condensed Consolidated Statements of Operations (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | Change (YoY) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change (YoY) | | :-------------------- | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Total revenue | 260,982 | 240,490 | 8.5% | 753,947 | 685,030 | 10.1% | | Subscription revenue | 100,564 | 83,122 | 21.0% | 290,039 | 233,467 | 24.2% | | Maintenance revenue | 121,134 | 113,755 | 6.5% | 353,981 | 330,840 | 7.0% | | License revenue | 39,284 | 43,613 | -9.9% | 109,927 | 120,723 | -8.9% | | Gross profit | 192,035 | 175,704 | 9.3% | 551,351 | 494,910 | 11.4% | | Operating income | 35,105 | 34,419 | 2.0% | 97,929 | 94,544 | 3.6% | | Net income | 12,502 | 4,393 | 184.6% | 25,762 | 5,419 | 375.4% | | Basic EPS | 0.04 | 0.01 | 300.0% | 0.08 | 0.02 | 300.0% | | Diluted EPS | 0.04 | 0.01 | 300.0% | 0.08 | 0.02 | 300.0% | Condensed Consolidated Statements of Comprehensive Income (Loss) This statement presents the company's net income and other comprehensive income (loss) components for the three and nine months ended September 30, 2020, and 2019 Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | 12,502 | 4,393 | 25,762 | 5,419 | | Foreign currency translation adjustment | 59,039 | (54,446) | 56,388 | (60,994) | | Comprehensive income (loss) | 71,541 | (50,053) | 82,150 | (55,575) | - Comprehensive income for the three months ended September 30, 2020, was $71.5 million, a significant increase from a comprehensive loss of $(50.1) million in the same period of 2019, primarily due to a foreign currency translation adjustment gain[21] Condensed Consolidated Statements of Stockholders' Equity This statement details changes in the company's stockholders' equity, including common stock, additional paid-in capital, and accumulated comprehensive income (loss), from December 31, 2019, to September 30, 2020 Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | Balance at Dec 31, 2019 | Balance at Sep 30, 2020 | Change | | :-------------------------------- | :---------------------- | :---------------------- | :----- | | Common Stock (Amount) | 308 | 311 | 3 | | Additional Paid-in Capital | 3,041,880 | 3,092,633 | 50,753 | | Accumulated Other Comprehensive Income (Loss) | (5,247) | 51,141 | 56,388 | | Accumulated Deficit | (387,419) | (361,657) | 25,762 | | Total Stockholders' Equity | 2,649,522 | 2,782,428 | 132,906 | - Total stockholders' equity increased by $132.9 million from December 31, 2019, to September 30, 2020, driven by net income, foreign currency translation adjustments, and stock-based compensation[16][24][26] Condensed Consolidated Statements of Cash Flows This statement summarizes the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2020, and 2019 Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | | Net cash provided by operating activities | 285,017 | 216,846 | 68,171 | | Net cash used in investing activities | (27,280) | (359,537) | 332,257 | | Net cash used in financing activities | (11,448) | (13,805) | 2,357 | | Effect of exchange rate changes on cash and cash equivalents | 5,325 | (5,064) | 10,389 | | Net increase (decrease) in cash and cash equivalents | 251,614 | (161,560) | 413,174 | | Cash and cash equivalents, End of period | 424,986 | 221,060 | 203,926 | - Net cash provided by operating activities increased by $68.2 million, while net cash used in investing activities decreased significantly by $332.3 million, primarily due to lower acquisition spending[29] Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures integral to understanding the condensed consolidated financial statements, covering accounting policies, estimates, and significant events 1. Organization and Nature of Operations This note describes SolarWinds Corporation as a leading provider of IT infrastructure management software, detailing its business model and customer base - SolarWinds Corporation is a leading provider of IT infrastructure management software, enabling organizations to monitor and manage IT environments across on-premise, cloud, or hybrid models[31] - The company's "SolarWinds Model" combines powerful, scalable, affordable, easy-to-use products with a high-velocity, low-touch sales approach[31] - The customer base includes network and systems engineers, database administrators, storage administrators, DevOps, service desk professionals, and managed service providers (MSPs)[31] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the financial statements, including those related to estimates, new pronouncements, and fair value measurements Potential Spin-Off of MSP Business This section details the board's authorization to explore spinning off the MSP business into a separate public company, aiming for distinct business strategies - On August 6, 2020, the board authorized exploring a potential spin-off of its MSP business into a newly created and separately traded public company[34] - If completed, the standalone MSP entity would provide IT service management solutions for MSPs, while SolarWinds would retain its Core IT Management business[34] - The spin-off would be structured as a tax-free, pro-rata distribution to shareholders, who would own shares of both companies[34] Use of Estimates This section highlights management's reliance on estimates and assumptions for financial reporting, particularly concerning asset valuations, revenue recognition, and the COVID-19 impact - The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures[35] - Significant accounting judgments include the valuation of goodwill, intangibles, long-lived assets, contingent consideration, revenue recognition, stock-based compensation, and income taxes[35][36] - Estimates of the COVID-19 pandemic's impact did not result in material adjustments for the reported periods, but actual results may differ materially from these estimates[35] Recently Adopted Accounting Pronouncements This section details the adoption of FASB ASC No. 2017-04, simplifying goodwill impairment accounting, and its non-material impact on the financial statements - On January 1, 2020, the company adopted FASB ASC No. 2017-04 "Intangibles-Goodwill and Other," which simplifies goodwill impairment accounting by removing step two of the two-step quantitative test[36][38] - The adoption of this standard did not have a material impact on the condensed consolidated financial statements for the nine months ended September 30, 2020[38] Fair Value Measurements This section explains the company's application of fair value measurement guidance, categorizing inputs into a three-tiered hierarchy and noting the approximation of fair value for certain assets and liabilities - The company applies authoritative guidance on fair value measurements, categorizing inputs into a three-tiered hierarchy: Level 1 (unadjusted quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[39][40] - The carrying amounts for cash, accounts receivable, accounts payable, and other accrued expenses approximate fair value due to their relatively short periods to maturity[41] Accumulated Other Comprehensive Income (Loss) This section details the shift in accumulated other comprehensive income from a loss to a gain, primarily driven by foreign currency translation adjustments Accumulated Other Comprehensive Income (Loss) (in thousands) | Metric (in thousands) | Balance at Dec 31, 2019 | Other comprehensive gain (loss) before reclassification | Balance at Sep 30, 2020 | | :-------------------------------- | :---------------------- | :---------------------------------------------------- | :---------------------- | | Foreign Currency Translation Adjustments | (5,247) | 56,388 | 51,141 | | Total Accumulated Other Comprehensive Income (Loss) | (5,247) | 56,388 | 51,141 | - Accumulated other comprehensive income (loss) shifted from a loss of $(5.2 million) at December 31, 2019, to a gain of $51.1 million at September 30, 2020, primarily due to a foreign currency translation adjustment gain of $56.4 million[42] Deferred Revenue This section outlines the changes in deferred revenue balances and the expected recognition schedule for future periods Deferred Revenue (in thousands) | Metric (in thousands) | Amount | | :-------------------------------- | :----- | | Balance at December 31, 2019 | 343,400 | | Deferred revenue recognized | (374,081) | | Additional amounts deferred | 388,833 | | Balance at September 30, 2020 | 358,152 | - Total deferred revenue increased from $343.4 million at December 31, 2019, to $358.2 million at September 30, 2020[43] - The company expects to recognize $323.3 million of deferred revenue within one year, $34.4 million in 1-3 years, and $0.5 million in more than 3 years[43] Deferred Commissions This section presents the balance of deferred commissions, categorized into current and non-current portions, as of December 31, 2019, and September 30, 2020 Deferred Commissions (in thousands) | Metric (in thousands) | Dec 31, 2019 | Sep 30, 2020 | | :-------------------------------- | :----------- | :----------- | | Balance | 10,624 | 13,647 | | Current | 2,543 | 3,370 | | Non-current | 8,081 | 10,277 | - Deferred commissions increased from $10.6 million at December 31, 2019, to $13.6 million at September 30, 2020[45] Cost of Revenue This section details the amortization of acquired license and subscription technologies, which are components of the cost of revenue, for the reported periods Cost of Revenue - Amortization of Acquired Technologies (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Amortization of acquired license technologies | 36,111 | 35,646 | 107,237 | 107,224 | | Amortization of acquired subscription technologies | 9,352 | 8,526 | 27,552 | 24,737 | | Total amortization of acquired technologies | 45,463 | 44,172 | 134,789 | 131,961 | - Amortization of acquired technologies, a component of cost of revenue, totaled $45.5 million for the three months ended September 30, 2020, and $134.8 million for the nine months ended September 30, 2020[46] - Interim condensed consolidated financial statements are prepared in conformity with GAAP and SEC reporting regulations, reflecting all normal adjustments but not all GAAP footnotes[32][33] - Management makes estimates and assumptions, particularly impacted by the COVID-19 pandemic, though no material adjustments resulted from COVID-19 estimates for the reported periods[35] - The company adopted FASB ASC No. 2017-04 "Intangibles-Goodwill and Other" on January 1, 2020, simplifying goodwill impairment accounting, with no material impact on the financial statements[36][38] 3. Goodwill This note details the changes in the company's goodwill balance, primarily due to foreign currency translation and other adjustments Goodwill (in thousands) | Metric (in thousands) | Amount | | :-------------------------------- | :----- | | Balance at December 31, 2019 | 4,058,198 | | Foreign currency translation and other adjustments | 50,548 | | Balance at September 30, 2020 | 4,108,746 | - Goodwill increased by $50.5 million from $4.06 billion at December 31, 2019, to $4.11 billion at September 30, 2020, primarily due to foreign currency translation and other adjustments[47] 4. Fair Value Measurements This note provides a summary of financial assets measured at fair value on a recurring basis, highlighting the significant increase in money market funds Fair Value Measurements (in thousands) | Metric (in thousands) | Sep 30, 2020 (Total) | Dec 31, 2019 (Total) | | :-------------------- | :------------------- | :------------------- | | Money market funds | 130,000 | 4,559 | | Trading security | 5,187 | 5,000 | | Total assets | 135,187 | 9,559 | - Total financial assets measured at fair value on a recurring basis increased significantly from $9.6 million at December 31, 2019, to $135.2 million at September 30, 2020, primarily due to an increase in money market funds[49][51] - There were no transfers between fair value measurement levels during the nine months ended September 30, 2020[48] 5. Debt This note details the company's debt structure, including the First Lien Term Loan, its principal amount, and the effective interest rate Debt (in thousands, except rates) | Metric (in thousands, except rates) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------------- | :----------- | :----------- | | First Lien Term Loan (principal) | 1,935,275 | 1,950,200 | | Effective Rate (First Lien Term Loan) | 2.90% | 4.55% | | Total principal amount | 1,935,275 | 1,950,200 | | Unamortized discount and debt issuance costs | (30,023) | (36,894) | | Total debt | 1,905,252 | 1,913,306 | | Less: Current portion of long-term debt | (19,900) | (19,900) | | Total long-term debt | 1,885,352 | 1,893,406 | - Total principal amount of debt decreased from $1.95 billion at December 31, 2019, to $1.94 billion at September 30, 2020[52] - The effective interest rate on the First Lien Term Loan decreased from 4.55% at December 31, 2019, to 2.90% at September 30, 2020[52] Senior Secured First Lien Credit Facilities This section describes the company's credit facilities, including the First Lien Term Loan and revolving credit facility, and their terms - As of September 30, 2020, the First Lien Credit Agreement provides for a $1.99 billion First Lien Term Loan due February 5, 2024, and a $125.0 million revolving credit facility[53][56] - Borrowings under the First Lien Term Loan bear interest at a floating rate (Eurodollar rate + 2.75% or base rate + 1.75%), subject to a 0.0% Eurodollar floor[54] - The company was in compliance with all covenants of the First Lien Credit Agreement as of September 30, 2020[59] 6. Earnings Per Share This note presents the basic and diluted earnings per share, along with the weighted-average shares used in their computation, for the reported periods Earnings Per Share (in thousands, except EPS) | Metric (in thousands, except EPS) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income available to common stockholders | 12,433 | 4,350 | 25,597 | 5,359 | | Basic earnings per share | 0.04 | 0.01 | 0.08 | 0.02 | | Diluted earnings per share | 0.04 | 0.01 | 0.08 | 0.02 | | Shares used in computation of basic EPS | 310,894 | 306,890 | 310,028 | 306,381 | | Shares used in computation of diluted EPS | 316,721 | 311,102 | 314,814 | 310,607 | - Basic and diluted EPS increased to $0.04 for the three months ended September 30, 2020 (from $0.01 in 2019), and to $0.08 for the nine months ended September 30, 2020 (from $0.02 in 2019)[60] - Weighted-average shares used in diluted EPS computation increased for both the three-month and nine-month periods ended September 30, 2020, compared to 2019[60] 7. Income Taxes This note details the company's income tax expense and effective tax rates, explaining the factors influencing changes, and outlines ongoing tax examinations Income Taxes (in thousands, except rates) | Metric (in thousands, except rates) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income before income taxes | 17,766 | 7,288 | 37,787 | 12,073 | | Income tax expense | 5,264 | 2,895 | 12,025 | 6,654 | | Effective tax rate | 29.6% | 39.7% | 31.8% | 55.1% | - The effective tax rate decreased for both the three-month (29.6% vs. 39.7%) and nine-month (31.8% vs. 55.1%) periods ended September 30, 2020, primarily due to increased income before taxes and a full valuation allowance against deferred tax assets from the Samanage acquisition[63] - Accrued interest and penalties related to unrecognized tax benefits totaled approximately $6.4 million at September 30, 2020[64] - The company is currently under examination by various tax authorities (IRS, Indian Tax Authority, California, Massachusetts, Texas) for different tax years[65] 8. Commitments and Contingencies This note addresses the company's involvement in legal proceedings, stating that their resolution is not expected to materially impact financial statements, despite inherent uncertainties - The company is involved in various legal proceedings arising in the ordinary course of business[68] - Management believes the resolution of pending claims is not expected to have a material adverse impact on consolidated financial statements, cash flows, or financial position[68] - The outcome of disputes is inherently uncertain, and an unfavorable resolution could materially affect future results of operations or cash flows[68] 9. Subsequent Events This note discloses significant events occurring after the reporting period, including a key acquisition and an intra-group intellectual property transfer SentryOne Acquisition This section details the acquisition of SentryOne in October 2020 for approximately $142.5 million, enhancing the company's database management offerings - In October 2020, SolarWinds acquired SQL Sentry Holdings, LLC (SentryOne), a database performance monitoring and DataOps solutions provider, for approximately $142.5 million, funded with cash on hand[69] - The acquisition complements SolarWinds' existing database management offerings and enhances support for Microsoft and Microsoft Azure environments[69][71] - The transaction will be accounted for using the acquisition method, with results included in the fourth quarter of 2020 financial statements[72] Intellectual Property Rights Transfer This section describes an intra-group transfer of intellectual property rights to an Irish subsidiary in November 2020, impacting future tax jurisdiction income mix - In November 2020, an intra-group transfer of certain intellectual property rights to an Irish subsidiary was completed, which will affect the mix of income by tax jurisdiction starting November 2020[73] - A discrete tax benefit may be recognized as a deferred tax asset during the fourth quarter of 2020, representing future amortization of the transferred IP rights in Ireland[73] - Two significant events occurred subsequent to September 30, 2020: the acquisition of SentryOne and an intra-group transfer of intellectual property rights[69][73] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion and analysis of SolarWinds Corporation's financial condition and results of operations, including an overview of the business, the impact of COVID-19, the potential spin-off of the MSP business, financial highlights, components of operations, period-over-period comparisons, non-GAAP financial measures, and liquidity and capital resources Overview This section introduces SolarWinds as a leading IT infrastructure management software provider, highlighting its product offerings, sales model, and public company status - SolarWinds is a leading provider of IT infrastructure management software, offering over 50 products to monitor and manage various IT environments (network, systems, applications, databases, etc.) across on-premise, cloud, or hybrid models[75][76] - The company utilizes a "high-velocity, low-touch sales model" to drive business growth and generate significant cash flow[75] - SolarWinds became a publicly traded company again in October 2018, following a take-private transaction in February 2016[77] Impacts of COVID-19 This section discusses the company's response to the COVID-19 pandemic, including remote work transition and the observed financial impact - The company transitioned nearly all its workforce to a remote working environment to prioritize personnel safety[78] - A small impact on financial results has been observed, and a significant longer-term impact on business, results of operations, and financial condition is not currently expected, though numerous uncertainties remain[78] - The company continues to evaluate the nature and extent of the COVID-19 pandemic's impact[78] Potential Spin-Off of MSP Business This section outlines the board's decision to explore spinning off the MSP business to enhance shareholder value and allow distinct strategic pursuits - On August 6, 2020, the board authorized management to explore a potential spin-off of its MSP business into a newly created and separately traded public company[79] - The potential spin-off aims to enable shareholders to more clearly evaluate the performance and future potential of each entity on a standalone basis, allowing each to pursue its own distinct business strategy[79] - The company incurred $2.6 million in spin-off exploration costs during the three months ended September 30, 2020, and expects to incur additional costs in future periods[80][81] Third Quarter Financial Highlights This section summarizes the company's key financial performance indicators for the third quarter, including revenue growth, profitability, cash flow, and a recent acquisition Revenue This section highlights the company's total revenue growth, the increasing proportion of recurring revenue, and key customer metrics for the third quarter - Total revenue for Q3 2020 was $261.0 million, an 8.5% increase from $240.5 million in Q3 2019[83] - Recurring revenue (subscription and maintenance) represented approximately 85% of total revenue in Q3 2020, up from 82% in Q3 2019[83] - Subscription Annual Recurring Revenue (ARR) was $411.1 million as of September 30, 2020, up from $343.1 million in 2019, and Total ARR was $887.2 million, an 11.4% increase from $796.4 million[86] - The company had over 320,000 customers as of September 30, 2020, with 1,004 customers spending more than $100,000 in the trailing twelve-month period[87][88] Profitability This section presents the company's net income and Adjusted EBITDA for the third quarter, demonstrating significant year-over-year growth Profitability (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | | Net income | 12,502 | 4,393 | 184.6% | | Adjusted EBITDA | 132,651 | 115,030 | 15.3% | - Net income for the three months ended September 30, 2020, was $12.5 million, a significant increase from $4.4 million in the prior year[91] - Adjusted EBITDA for the three months ended September 30, 2020, was $132.7 million, up from $115.0 million in the prior year[91] Cash Flow This section highlights the increase in operating cash flows and changes in interest and tax payments for the third quarter - Cash flows from operations for the three months ended September 30, 2020, were $100.9 million, an increase from $75.2 million in the same period of 2019[92] - Cash payments for interest on long-term debt decreased to $14.6 million in Q3 2020 from $25.7 million in Q3 2019[92] - Cash payments for income taxes increased to $23.7 million in Q3 2020 from $9.2 million in Q3 2019[92] Acquisition This section details the October 2020 acquisition of SentryOne for approximately $142.5 million, enhancing the company's database performance monitoring solutions - In October 2020, SolarWinds acquired SQL Sentry Holdings, LLC (SentryOne), a leading provider of database performance monitoring and DataOps solutions, for approximately $142.5 million, funded with cash on hand[93] - The SentryOne offering complements SolarWinds' existing database management solutions and enhances support for Microsoft and Microsoft Azure environments[93] - Total revenue increased by 8.5% year-over-year to $261.0 million for the three months ended September 30, 2020[83] - Recurring revenue constituted approximately 85% of total revenue in Q3 2020, up from 82% in Q3 2019[83] - Net income significantly increased to $12.5 million in Q3 2020 from $4.4 million in Q3 2019, and Adjusted EBITDA rose to $132.7 million from $115.0 million[91] - Cash flows from operations were $100.9 million in Q3 2020, up from $75.2 million in Q3 2019[92] - In October 2020, the company acquired SentryOne for approximately $142.5 million, enhancing its database performance monitoring and DataOps solutions[93] Components of Our Results of Operations This section breaks down the key elements contributing to the company's financial performance, including revenue streams, cost of revenue, operating expenses, and other income/expense items Revenue This section defines the company's revenue sources, distinguishing between recurring (subscription and maintenance) and license revenue, and notes the introduction of subscription pricing options - Recurring Revenue: Derived from SaaS offerings and time-based license arrangements (subscription revenue), and maintenance services for perpetual license products[95] - Subscription revenue grows as customers add new products, upgrade capacity, or increase usage, particularly for MSP products[95] - License Revenue: Generated from sales of perpetual licenses for on-premise products, recognized upon delivery of the electronic license key[95] - In April 2020, subscription pricing options were introduced for certain network, systems, and database management products, potentially impacting the mix of license and recurring revenue[95] Cost of Revenue This section outlines the components of cost of revenue, including technical support, hosting fees, and amortization of acquired technologies - Cost of recurring revenue includes technical support personnel costs, royalty fees, public cloud infrastructure and hosting fees, and allocated overhead for subscription and maintenance services[99] - Amortization of acquired technologies, stemming from the Take Private and other acquisitions, is also included in the cost of revenue[99] Operating Expenses This section details the primary components of operating expenses, emphasizing personnel costs, employee growth, and the impact of stock-based compensation and COVID-19 on travel - Personnel costs, including salaries, benefits, bonuses, sales commissions, and stock-based compensation, are the most significant component of operating expenses[96] - Total employees increased to 3,241 as of September 30, 2020, from 3,121 as of September 30, 2019[96] - Stock-based compensation expense increased due to equity awards and modifications to eliminate performance vesting conditions, while travel costs declined due to COVID-19[96] - Operating expenses are categorized into Sales and Marketing, Research and Development, General and Administrative, and Amortization of Acquired Intangibles[100] Other Income (Expense) This section explains that other income (expense) primarily consists of interest expense and foreign currency gains or losses, with interest expense expected to decrease over time - This category primarily consists of interest expense and gains or losses resulting from changes in foreign currency exchange rates[97] - Interest expense is expected to decrease as the company repays its indebtedness[97] Foreign Currency This section addresses the company's exposure to foreign currency exchange rate fluctuations, which impact financial results, with key exposures identified in Euro, British Pound Sterling, and Australian Dollar - As a global company, SolarWinds is exposed to adverse movements in foreign currency exchange rates, which impact total assets, liabilities, revenue, operating expenses, and cash flows of its foreign subsidiaries[98] - Fluctuations in the Euro, British Pound Sterling, and Australian Dollar against the United States Dollar are key exposures[98] Income Tax Expense This section explains that income tax expense comprises domestic and foreign corporate income taxes, noting that international income growth may lead to a declining effective tax rate - Income tax expense consists of domestic and foreign corporate income taxes related to product sales[99] - The tax rate on income earned by North American entities is higher than that on international entities[99] - The company expects international income to grow as a percentage of total income, which may lead to a decline in its effective income tax rate over time[99] - Revenue primarily consists of recurring revenue (subscription and maintenance) and perpetual license revenue[94] - Operating expenses, with personnel costs as the most significant component, include sales and marketing, research and development, general and administrative, and amortization of acquired intangibles[96][100] - Other income (expense) mainly comprises interest expense and foreign currency gains/losses, while income tax expense is influenced by domestic and foreign corporate income taxes[97][99] Comparison of the Three Months Ended September 30, 2020 and 2019 This section provides a detailed comparative analysis of the company's financial performance for the third quarter of 2020 versus 2019, covering revenue, costs, and profitability Revenue This section analyzes the changes in subscription, maintenance, and license revenue for the third quarter, highlighting growth drivers and impacts of economic conditions Revenue (in thousands) | Revenue Type (in thousands) | Q3 2020 | Q3 2019 | Change | % of Revenue (Q3 2020) | % of Revenue (Q3 2019) | | :-------------------------- | :------ | :------ | :----- | :--------------------- | :--------------------- | | Subscription | 100,564 | 83,122 | 21.0% | 38.5% | 34.6% | | Maintenance | 121,134 | 113,755 | 6.5% | 46.4% | 47.3% | | Total recurring revenue | 221,698 | 196,877 | 12.6% | 84.9% | 81.9% | | License | 39,284 | 43,613 | -9.9% | 15.1% | 18.1% | | Total revenue | 260,982 | 240,490 | 8.5% | 100.0% | 100.0% | - Total revenue increased by $20.5 million, or 8.5%, for the three months ended September 30, 2020, compared to the same period in 2019[101] - Core IT Management product revenue increased by 6.6% to $184.8 million, and MSP product revenue increased by 13.4% to $76.2 million[101] Recurring Revenue This section details the growth in subscription and maintenance revenue, driven by MSP product sales, cloud offerings, and strong customer retention - Subscription revenue increased by $17.4 million (21.0%) due to additional MSP product sales, cloud-based database management offerings, and foreign currency strengthening[102] - The net retention rate for subscription products was approximately 105% for both trailing twelve-month periods ended September 30, 2020 and 2019, driven by strong customer retention and expansion in MSP products[103] - Maintenance revenue increased by $7.4 million (6.5%) due to a growing customer base, strong renewal rates, and annual price increases[104] - The maintenance renewal rate for perpetual license products decreased to approximately 92% in 2020 from 95% in 2019, primarily due to a planned downgrade on a large U.S. Federal maintenance renewal[105] License Revenue This section explains the decrease in license revenue, attributing it to the challenging economic environment caused by COVID-19 and a shift towards subscription sales - License revenue decreased by $4.3 million, or 9.9%, primarily due to the difficult economic environment caused by COVID-19 and an increase in subscription sales of historically perpetual license products[106] Cost of Revenue This section analyzes the increase in total cost of revenue, driven by higher public cloud infrastructure fees, depreciation, and personnel costs Cost of Revenue (in thousands) | Cost of Revenue (in thousands) | Q3 2020 | Q3 2019 | Change | % of Revenue (Q3 2020) | % of Revenue (Q3 2019) | | :----------------------------- | :------ | :------ | :----- | :--------------------- | :--------------------- | | Cost of recurring revenue | 23,484 | 20,614 | 13.9% | 9.0% | 8.6% | | Amortization of acquired technologies | 45,463 | 44,172 | 2.9% | 17.4% | 18.4% | | Total cost of revenue | 68,947 | 64,786 | 6.4% | 26.4% | 26.9% | - Total cost of revenue increased by $4.2 million, or 6.4%, primarily due to increases in public cloud infrastructure and hosting fees ($1.7 million), depreciation and other amortization ($0.9 million), and personnel costs ($0.5 million, including $0.4 million in stock-based compensation)[107] - Amortization of acquired technologies included $41.4 million related to the Take Private for the three months ended September 30, 2020[107] Operating Expenses This section analyzes the increase in total operating expenses, particularly in general and administrative costs due to personnel and spin-off exploration, and sales and marketing Operating Expenses (in thousands) | Operating Expense (in thousands) | Q3 2020 | Q3 2019 | Change | % of Revenue (Q3 2020) | % of Revenue (Q3 2019) | | :------------------------------- | :------ | :------ | :----- | :--------------------- | :--------------------- | | Sales and marketing | 73,460 | 68,290 | 7.6% | 28.1% | 28.4% | | Research and development | 31,288 | 29,575 | 5.8% | 12.0% | 12.3% | | General and administrative | 33,558 | 25,405 | 32.1% | 12.9% | 10.6% | | Amortization of acquired intangibles | 18,624 | 18,015 | 3.4% | 7.1% | 7.5% | | Total operating expenses | 156,930 | 141,285 | 11.1% | 60.1% | 58.7% | - Total operating expenses increased by $15.6 million, or 11.1%, to $156.9 million[108] - General and administrative expenses saw the largest percentage increase (32.1%), driven by personnel costs ($7.0 million, including $6.6 million stock-based compensation) and $2.5 million in spin-off exploration costs[110] - Sales and marketing expenses increased by $5.2 million (7.6%), mainly due to personnel costs ($6.6 million, including $4.0 million stock-based compensation), partially offset by reduced travel[108] Interest Expense, Net This section details the decrease in net interest expense, primarily due to lower interest rates and a reduction in the outstanding debt balance Interest Expense, Net (in thousands, except percentages) | Metric (in thousands, except percentages) | Q3 2020 | Q3 2019 | Change | % of Revenue (Q3 2020) | % of Revenue (Q3 2019) | | :-------------------------------- | :------ | :------ | :----- | :--------------------- | :--------------------- | | Interest expense, net | (16,792) | (27,418) | 38.8% | -6.4% | -11.4% | - Interest expense, net, decreased by $10.6 million, or 38.8%, primarily due to decreases in interest rates on debt and a reduction in the outstanding debt balance[113] - The weighted-average effective interest rate on debt decreased to 2.95% in Q3 2020 from 5.00% in Q3 2019[113] Other Income (Expense), Net This section reports a decrease in other income (expense), net, primarily due to the impact of foreign currency exchange rate changes Other Income (Expense), Net (in thousands) | Metric (in thousands) | Q3 2020 | Q3 2019 | Change | % of Revenue (Q3 2020) | % of Revenue (Q3 2019) | | :-------------------- | :------ | :------ | :----- | :--------------------- | :--------------------- | | Other income (expense), net | (547) | 287 | -290.6% | -0.2% | 0.1% | - Other income (expense), net, decreased by $0.8 million, primarily due to the impact of changes in foreign currency exchange rates[114] Income Tax Expense This section analyzes the increase in income tax expense and the decrease in the effective tax rate, driven by higher income before taxes and a valuation allowance Income Tax Expense (in thousands, except rates) | Metric (in thousands, except rates) | Q3 2020 | Q3 2019 | Change | | :-------------------------------- | :------ | :------ | :----- | | Income before income taxes | 17,766 | 7,288 | 143.8% | | Income tax expense | 5,264 | 2,895 | 81.8% | | Effective tax rate | 29.6% | 39.7% | -10.1% | - Income tax expense increased by $2.4 million, while the effective tax rate decreased to 29.6% from 39.7%[115] - The decrease in effective tax rate was primarily due to an increase in income before income taxes and the impact of a full valuation allowance against deferred tax assets related to the Samanage acquisition[115] - Total revenue increased by $20.5 million (8.5%) to $261.0 million, driven by growth in recurring revenue[101] - Net income increased significantly by $8.1 million (184.6%) to $12.5 million[18] - Interest expense, net, decreased by $10.6 million (38.8%) due to lower interest rates and reduced outstanding debt[113] - Income tax expense increased by $2.4 million, but the effective tax rate decreased to 29.6% from 39.7%[115] Comparison of the Nine Months Ended September 30, 2020 and 2019 This section provides a detailed comparative analysis of the company's financial performance for the nine months ended September 30, 2020, versus 2019, covering revenue, costs, and profitability Revenue This section analyzes the changes in subscription, maintenance, and license revenue for the nine-month period, highlighting growth drivers and impacts of economic conditions Revenue (in thousands) | Revenue Type (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | % of Revenue (2020) | % of Revenue (2019) | | :-------------------------- | :-------------------------- | :-------------------------- | :----- | :------------------ | :------------------ | | Subscription | 290,039 | 233,467 | 24.2% | 38.5% | 34.1% | | Maintenance | 353,981 | 330,840 | 7.0% | 47.0% | 48.3% | | Total recurring revenue | 644,020 | 564,307 | 14.1% | 85.4% | 82.4% | | License | 109,927 | 120,723 | -8.9% | 14.6% | 17.6% | | Total revenue | 753,947 | 685,030 | 10.1% | 100.0% | 100.0% | - Total revenue increased by $68.9 million, or 10.1%, for the nine months ended September 30, 2020, compared to the same period in 2019[116] - Core IT Management product revenue increased by 8.2% to $531.2 million, and MSP product revenue increased by 14.8% to $222.7 million[116][117] Recurring Revenue This section details the growth in subscription and maintenance revenue for the nine-month period, driven by MSP product sales, acquisitions, and strong customer retention - Subscription revenue increased by $56.6 million (24.2%) due to additional MSP product sales and contributions from acquired products (SolarWinds Service Desk and Database Performance Monitor)[118] - The net retention rate for subscription products was approximately 105% for both trailing twelve-month periods ended September 30, 2020 and 2019, driven by strong customer retention and expansion in MSP products[119] - Maintenance revenue increased by $23.1 million (7.0%) due to a growing customer base, strong renewal rates, and annual price increases[120] - The maintenance renewal rate for perpetual license products decreased to approximately 92% in 2020 from 95% in 2019, mainly due to a planned downgrade on a large U.S. Federal maintenance renewal[121] License Revenue This section explains the decrease in license revenue for the nine-month period, primarily due to the economic impact of COVID-19 and foreign currency weakening - License revenue decreased by $10.8 million, or 8.9%, primarily due to the difficult economic environment caused by COVID-19 in the second and third quarters of 2020 and the weakening of most foreign currencies relative to the U.S. dollar[122] Cost of Revenue This section analyzes the increase in total cost of revenue for the nine-month period, driven by higher public cloud infrastructure fees, personnel costs, and amortization from acquisitions Cost of Revenue (in thousands) | Cost of Revenue (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | % of Revenue (2020) | % of Revenue (2019) | | :----------------------------- | :-------------------------- | :-------------------------- | :----- | :------------------ | :------------------ | | Cost of recurring revenue | 67,807 | 58,159 | 16.6% | 9.0% | 8.5% | | Amortization of acquired technologies | 134,789 | 131,961 | 2.1% | 17.9% | 19.3% | | Total cost of revenue | 202,596 | 190,120 | 6.6% | 26.9% | 27.8% | - Total cost of revenue increased by $12.5 million, or 6.6%, primarily due to increases in public cloud infrastructure and hosting fees ($4.8 million), personnel costs ($2.9 million, including $0.6 million stock-based compensation), and depreciation and other amortization ($2.4 million)[123] - The increase in amortization of acquired technologies is primarily related to intangibles acquired through the Samanage and VividCortex acquisitions in 2019[123] Operating Expenses This section analyzes the increase in total operating expenses for the nine-month period, particularly in general and administrative costs due to personnel, spin-off exploration, and sales and marketing Operating Expenses (in thousands) | Operating Expense (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | % of Revenue (2020) | % of Revenue (2019) | | :------------------------------- | :-------------------------- | :-------------------------- | :----- | :------------------ | :------------------ | | Sales and marketing | 216,550 | 193,698 | 11.8% | 28.7% | 28.3% | | Research and development | 93,878 | 82,468 | 13.8% | 12.5% | 12.0% | | General and administrative | 87,780 | 72,382 | 21.3% | 11.6% | 10.6% | | Amortization of acquired intangibles | 55,214 | 51,818 | 6.6% | 7.3% | 7.6% | | Total operating expenses | 453,422 | 400,366 | 13.2% | 60.1% | 58.4% | - Total operating expenses increased by $53.1 million, or 13.2%, to $453.4 million[124] - General and administrative expenses increased by $15.4 million (21.3%), driven by personnel costs ($14.2 million, including $9.5 million stock-based compensation), $2.5 million in spin-off exploration costs, and increased provision for credit losses[126] - Sales and marketing expenses increased by $22.9 million (11.8%), primarily due to personnel costs ($19.7 million, including $6.8 million stock-based compensation) and marketing program costs[124] Interest Expense, Net This section details the decrease in net interest expense for the nine-month period, primarily due to lower interest rates and a reduction in the outstanding debt balance Interest Expense, Net (in thousands, except percentages) | Metric (in thousands, except percentages) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | % of Revenue (2020) | % of Revenue (2019) | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | :------------------ | :------------------ | | Interest expense, net | (59,200) | (82,977) | 28.7% | -7.9% | -12.1% | - Interest expense, net, decreased by $23.8 million, or 28.7%, primarily due to decreases in interest rates on debt and a reduction in the outstanding debt balance[128] - The weighted-average effective interest rate on debt decreased to 3.53% in the nine months ended September 30, 2020, from 5.15% in 2019[128] Other Income (Expense), Net This section reports a decrease in other income (expense), net, for the nine-month period, primarily due to the impact of foreign currency exchange rate changes Other Income (Expense), Net (in thousands) | Metric (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | % of Revenue (2020) | % of Revenue (2019) | | :-------------------- | :-------------------------- | :-------------------------- | :----- | :------------------ | :------------------ | | Other income (expense), net | (942) | 506 | -286.6% | -0.1% | 0.1% | - Other income (expense), net, decreased by $1.4 million, primarily due to the impact of changes in foreign currency exchange rates[129] Income Tax Expense This section analyzes the increase in income tax expense and the decrease in the effective tax rate for the nine-month period, driven by higher income before taxes and a valuation allowance Income Tax Expense (in thousands, except rates) | Metric (in thousands, except rates) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | | Income before income taxes | 37,787 | 12,073 | 212.9% | | Income tax expense | 12,025 | 6,654 | 80.7% | | Effective tax rate | 31.8% | 55.1% | -23.3% | - Income tax expense increased by $5.4 million, while the effective tax rate decreased to 31.8% from 55.1%[130] - The decrease in effective tax rate was primarily due to an increase in income before income taxes and the impact of a full valuation allowance against deferred tax assets related to the Samanage acquisition[130] - Total revenue increased by $68.9 million (10.1%) to $753.9 million, driven by strong recurring revenue growth[116] - Net income increased significantly by $20.3 million (375.4%) to $25.8 million[18] - Interest expense, net, decreased by $23.8 million (28.7%) due to lower interest rates and reduced outstanding debt[128] - Income tax expense increased by $5.4 million, but the effective tax rate decreased to 31.8% from 55.1%[130] Non-GAAP Financial Measures This section presents non-GAAP financial measures, including revenue, operating income, and Adjusted EBITDA, to provide a clearer view of core operational performance Non-GAAP Revenue This section presents non-GAAP revenue, which excludes purchase accounting impacts from acquisitions, to offer a more comparable view of revenue growth - Non-GAAP revenue excludes the impact of purchase accounting from acquisitions to provide a better assessment of revenue growth rates and comparability between periods[133] Non-GAAP Revenue (in thousands) | Revenue Type (in thousands) | 3 Months Ended Sep 30, 2020 (Non-GAAP) | 3 Months Ended Sep 30, 2019 (Non-GAAP) | 9 Months Ended Sep 30, 2020 (Non-GAAP) | 9 Months Ended Sep 30, 2019 (Non-GAAP) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Subscription | 100,857 | 85,337 | 292,405 | 237,501 | | Maintenance | 121,134 | 113,755 | 353,981 | 330,840 | | Total recurring revenue | 221,991 | 199,092 | 646,386 | 568,341 | | License | 39,284 | 43,613 | 109,927 | 120,723 | | Total non-GAAP revenue | 261,275 | 242,705 | 756,313 | 689,064 | Non-GAAP Operating Income and Non-GAAP Operating Margin This section presents non-GAAP operating income and margin, excluding specific non-core items to provide a clearer view of operational profitability - Non-GAAP operating income excludes the impact of purchase accounting, amortization of acquired intangible assets, stock-based compensation, acquisition and other costs, spin-off exploration costs, and restructuring costs[135][136][137][139] Non-GAAP Operating Income and Non-GAAP Operating Margin (in thousands, except margin data) | Metric (in thousands, except margin data) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | GAAP operating income | 35,105 | 34,419 | 97,929 | 94,544 | | Non-GAAP operating income | 127,315 | 110,996 | 345,797 | 317,943 | | GAAP operating margin | 13.5% | 14.3% | 13.0% | 13.8% | | Non-GAAP operating margin | 48.7% | 45.7% | 45.7% | 46.1% | [Adjusted EBITDA and Adjusted EBITDA Margin](index=33&type=section&id=Adjusted%20EBITDA%20and%20Adjusted%20EBIT