solarwinds(SWI) - 2021 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements The company's financials reflect the N-able spin-off, a decrease in assets, and lower net income and cash flow Condensed Consolidated Balance Sheets Total assets decreased to $4.83 billion due to the N-able spin-off, while cash increased and equity declined Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $708,890 | $270,708 | | Total current assets | $820,480 | $512,733 | | Goodwill | $3,326,805 | $3,375,319 | | Total assets | $4,834,811 | $5,710,483 | | Liabilities & Equity | | | | Total current liabilities | $406,568 | $491,204 | | Long-term debt, net | $1,873,472 | $1,882,672 | | Total liabilities | $2,512,312 | $2,699,796 | | Total stockholders' equity | $2,322,499 | $3,010,687 | Condensed Consolidated Statements of Operations Q3 revenue decreased slightly while operating loss widened significantly due to higher expenses Q3 2021 vs Q3 2020 Operating Results (in thousands) | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Total Revenue | $181,271 | $184,818 | | Gross Profit | $123,440 | $131,891 | | Operating Income (Loss) | $(3,822) | $20,995 | | Net Income (Loss) from Continuing Operations | $1,080 | $2,443 | | Net Income (Loss) from Discontinued Operations | $(10,059) | $10,059 | | Net Diluted EPS | $(0.06) | $0.08 | Nine Months 2021 vs 2020 Operating Results (in thousands) | Metric | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | | Total Revenue | $531,915 | $531,221 | | Gross Profit | $362,187 | $375,047 | | Operating Income (Loss) | $(22,510) | $50,326 | | Net Income (Loss) from Continuing Operations | $(42,585) | $(10,766) | | Net Income from Discontinued Operations | $14,822 | $36,528 | | Net Diluted EPS | $(0.18) | $0.17 | Condensed Consolidated Statements of Cash Flows Operating cash flow significantly decreased, while financing activities provided cash from the N-able spin-off Nine Months Ended Sep 30 Cash Flow Summary (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities (continuing) | $81,945 | $202,942 | | Net cash used in investing activities (continuing) | $(9,587) | $(18,116) | | Net cash provided by (used in) financing activities (continuing) | $247,625 | $(11,448) | | Net cash provided by discontinued activities | $22,212 | $71,958 | | Net increase in cash and cash equivalents | $338,392 | $251,614 | Notes to the Condensed Consolidated Financial Statements Notes detail the N-able spin-off, a special dividend, and significant costs from the Cyber Incident - On July 19, 2021, the company completed the separation of its N-able business, which is now a separately traded public company and its historical financial results are reflected as discontinued operations[32][49] - The company effected a 2:1 reverse stock split on July 30, 2021, and paid a special cash dividend of $1.50 per share, totaling $237.2 million, on August 24, 2021[35][36] - As a result of the Cyber Incident, the company is subject to numerous lawsuits, including class actions and shareholder derivative actions, as well as investigations by the DOJ, SEC, and state Attorneys General[98][99] - The company will indemnify N-able for all liabilities arising from the Cyber Incident, with the exception of certain specified expenses[103] Cyber Incident Costs (Nine Months Ended Sep 30, 2021, in millions) | Description | Amount | | :--- | :--- | | Pretax Gross Expenses | $39.8 | | Insurance Receipts/Proceeds | $(15.0) | | Net Pretax Expense | $24.8 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the N-able spin-off, ongoing Cyber Incident impacts, and Q3 financial performance - The company completed the spin-off of its N-able business on July 19, 2021, with related separation costs of $7.3 million for Q3 and $30.4 million for the nine months ended Sep 30, 2021[109][110] - The company estimates ongoing annual costs of approximately $20 million for its 'Secure By Design' initiatives, implemented in response to the Cyber Incident[115] - As of September 30, 2021, the company had over 300,000 customers, with 786 of them spending more than $100,000 in the trailing twelve months[122] Annual Recurring Revenue (ARR) as of September 30, 2021 | Metric | 2021 (in thousands) | 2020 (in thousands) | YoY Growth | | :--- | :--- | :--- | :--- | | Subscription ARR | $130,176 | $105,869 | 23.0% | | Total ARR | $623,761 | $572,078 | 9.0% | Comparison of the Three and Nine Months Ended September 30, 2021 and 2020 Q3 revenue fell 1.9% as subscription growth was offset by a decline in license revenue and higher expenses - The maintenance renewal rate for the trailing twelve months ended September 30, 2021, was 89%, down from 92% in the prior year, with the decline primarily attributed to the Cyber Incident[143][144] - Q3 2021 operating expenses increased primarily due to higher personnel costs, marketing program costs, and $2.4 million in net costs related to the Cyber Incident and $1.4 million in spin-off costs[148][149][150] Q3 2021 vs Q3 2020 Revenue Breakdown (in thousands) | Revenue Type | Q3 2021 | Q3 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Subscription | $32,293 | $26,871 | $5,422 | 20.2% | | Maintenance | $119,742 | $118,663 | $1,079 | 0.9% | | License | $29,236 | $39,284 | $(10,048) | -25.6% | | Total Revenue | $181,271 | $184,818 | $(3,547) | -1.9% | Non-GAAP Financial Measures from Continuing Operations Non-GAAP operating income and Adjusted EBITDA both declined in Q3 compared to the prior year Reconciliation of GAAP Operating Income to Non-GAAP Operating Income (Q3, in thousands) | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | GAAP operating income (loss) | $(3,822) | $20,995 | | Stock-based compensation & related taxes | $16,019 | $18,390 | | Amortization of acquired tech & intangibles | $53,666 | $51,878 | | Restructuring costs | $2,596 | $2,022 | | Cyber Incident costs, net | $2,927 | $— | | Other adjustments | $232 | $1,469 | | Non-GAAP operating income | $71,618 | $94,754 | Adjusted EBITDA Reconciliation (Q3, in thousands) | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net income (loss) from continuing operations | $1,080 | $2,443 | | Amortization and depreciation | $57,354 | $55,210 | | Income tax expense (benefit) | $(19,321) | $1,505 | | Interest expense, net | $15,897 | $16,792 | | Stock-based compensation & related taxes | $16,019 | $18,390 | | Cyber Incident costs, net | $2,927 | $— | | Other adjustments | $1,312 | $3,708 | | Adjusted EBITDA | $75,268 | $98,048 | Liquidity and Capital Resources The company maintains strong liquidity with $708.9 million in cash despite a decrease in operating cash flow - Cash and cash equivalents stood at $708.9 million as of September 30, 2021[184] - Total debt was $1.9 billion as of September 30, 2021, with $117.5 million available under the revolving credit facility[187] - Net cash from financing activities for the nine months ended Sep 30, 2021, was significantly impacted by a $505.6 million net distribution from the N-able spin-off and a $237.2 million special dividend payment[198][199] Quantitative and Qualitative Disclosures of Market Risk The company is exposed to market risks from variable interest rates on its debt and foreign currency fluctuations - The company's debt has variable interest rates, and a hypothetical 100 basis point increase in interest rates would result in an approximate annual increase of $19.3 million in interest expense[209] - The company faces foreign currency exchange risk from operating globally, with primary exposures in the Euro, British Pound Sterling, and Australian Dollar[211] - The company utilizes foreign currency forward contracts to manage exposure but had no contracts outstanding as of September 30, 2021[215][216] Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes in the quarter - The CEO and CFO concluded that as of September 30, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level[220] - No material changes to internal control over financial reporting occurred during the third quarter of 2021[221] PART II - OTHER INFORMATION Legal Proceedings The company faces numerous lawsuits and investigations related to the Cyber Incident - The company is subject to numerous lawsuits and government investigations as a result of the Cyber Incident[224] - Excluding the Cyber Incident, the company is not party to any material legal proceedings, though it may be involved in various claims arising in the ordinary course of business[225] Risk Factors No material changes to risk factors were reported since the last disclosure - No material changes to the company's risk factors have occurred since the last quarterly report[226] Exhibits This section lists key exhibits filed, including agreements related to the N-able spin-off - Key exhibits filed include the Separation and Distribution Agreement with N-able, Inc and related transaction agreements[229] - An amendment to the First Lien Credit Agreement, dated July 27, 2021, was also filed as an exhibit[229]