solarwinds(SWI) - 2022 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Presents the company's unaudited condensed consolidated financial statements for the first quarters of 2022 and 2021 Condensed Consolidated Balance Sheets Details the company's financial position with key assets, liabilities, and stockholders' equity as of March 31, 2022 | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Total Assets | $4,761,749 | $4,792,127 | $(30,378) | | Total Liabilities | $2,484,371 | $2,504,231 | $(19,860) | | Total Stockholders' Equity | $2,277,378 | $2,287,896 | $(10,518) | | Cash and cash equivalents | $751,218 | $732,116 | $19,102 | | Goodwill | $3,299,468 | $3,308,405 | $(8,937) | | Long-term debt, net | $1,868,010 | $1,870,769 | $(2,759) | Condensed Consolidated Statements of Operations Summarizes revenues, expenses, and net loss for the first quarters of 2022 and 2021 | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | YoY Change (%) | | :---------------------------------- | :------------------ | :------------------ | :-------------------- | :------------- | | Total Revenue | $176,868 | $173,856 | $3,012 | 1.7% | | Subscription Revenue | $38,747 | $28,317 | $10,430 | 36.8% | | Maintenance Revenue | $115,495 | $120,665 | $(5,170) | -4.3% | | License Revenue | $22,626 | $24,874 | $(2,248) | -9.0% | | Gross Profit | $141,810 | $117,785 | $24,025 | 20.4% | | Operating Income (Loss) | $11,441 | $(11,142) | $22,583 | N/A | | Net Loss from Continuing Operations | $(4,659) | $(21,780) | $17,121 | N/A | | Net Loss | $(4,659) | $(7,160) | $2,501 | N/A | | Basic Loss Per Share | $(0.03) | $(0.05) | $0.02 | N/A | Condensed Consolidated Statements of Comprehensive Income (Loss) Reports net loss and other comprehensive income items, including foreign currency translation adjustments | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :------------------------------ | :------------------ | :------------------ | :-------------------- | | Net Loss | $(4,659) | $(7,160) | $2,501 | | Foreign currency translation adjustment | $(16,895) | $(65,750) | $48,855 | | Comprehensive Income (Loss) | $(21,554) | $(72,910) | $51,356 | Condensed Consolidated Statements of Stockholders' Equity Details the changes in stockholders' equity during the first quarter of 2022 | Metric | Balance at Dec 31, 2021 (in thousands) | Changes (in thousands) | Balance at Mar 31, 2022 (in thousands) | | :-------------------------------- | :----------------------------------- | :--------------------- | :----------------------------------- | | Total Stockholders' Equity | $2,287,896 | $(10,518) | $2,277,378 | | Foreign currency translation adjustment | $1,306 | $(16,895) | $(15,589) | | Net loss | $(280,352) | $(4,659) | $(285,011) | | Stock-based compensation | N/A | $15,462 | N/A | Condensed Consolidated Statements of Cash Flows Summarizes cash flows from operating, investing, and financing activities for the first quarters of 2022 and 2021 | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------------------------------------- | :------------------ | :------------------ | :-------------------- | | Net cash provided by operating activities from continuing operations | $40,258 | $15,965 | $24,293 | | Net cash used in investing activities from continuing operations | $(10,800) | $(3,868) | $(6,932) | | Net cash used in financing activities from continuing operations | $(9,629) | $(10,423) | $794 | | Net increase in cash and cash equivalents | $19,102 | $3,854 | $15,248 | | Cash and cash equivalents, End of period | $751,218 | $374,352 | $376,866 | Notes to Condensed Consolidated Financial Statements Provides detailed explanations of significant accounting policies, discontinued operations, goodwill, debt, and contingencies 1. Organization and Nature of Operations Describes the company's business model and the recent spin-off of its N-able managed service provider business - SolarWinds Corporation is a leading provider of simple, powerful, and secure IT management software, serving organizations of all sizes with a "customer-driven products with an 'inside-first' selling motion" approach[29] - On July 19, 2021, the company completed the spin-off of its managed service provider (N-able) business into a separate public company, N-able, Inc, with N-able's historical financial results now reported as discontinued operations[30] 2. Summary of Significant Accounting Policies Outlines the basis of preparation for the interim financial statements and key accounting policies like goodwill impairment - Interim condensed consolidated financial statements are prepared in conformity with GAAP and SEC regulations, are unaudited, and include normal adjustments; they should be read with the Annual Report on Form 10-K for the year ended December 31, 2021[31][32] - Effective July 30, 2021, a 2:1 reverse stock split was effected, and all share and per share figures have been retroactively restated[33] - The company early adopted ASU No 2021-08 "Business Combinations" as of January 1, 2022, which did not have a material impact on Q1 2022 financial statements[35][37] - Goodwill is tested for impairment annually on October 1st or when circumstances indicate, with the latest quantitative assessment as of December 31, 2021, showing fair value exceeded carrying value by 7.2%, thus no impairment was recognized[38][39] - As of March 31, 2022, despite a further decline in market capitalization, no impairment indicators were identified, but future impairment charges are possible if cash flow assumptions are not realized or stock price declines persist[40][41] Deferred Revenue Summary | Metric | Balance at Dec 31, 2021 | Deferred revenue recognized | Additional amounts deferred | Deferred revenue acquired | Balance at Mar 31, 2022 | | :-------------------------- | :---------------------- | :-------------------------- | :------------------------ | :------------------------ | :---------------------- | | Total Deferred Revenue | $362,669 | $(125,297) | $126,840 | $263 | $364,475 | Amortization of Acquired Technologies | Type | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Amortization of acquired license technologies | $14,483 | $37,336 | $(22,853) | | Amortization of acquired subscription technologies | $2,744 | $3,081 | $(337) | | Total amortization of acquired technologies | $17,227 | $40,417 | $(23,190) | 3. Discontinued Operations Presents the financial results of the spun-off N-able business, which are now classified as discontinued operations - The N-able business spin-off was completed on July 19, 2021, and its results are presented as discontinued operations for periods up to that date[51][52] - Spin-off costs were $0.2 million in Q1 2022 and $9.9 million in Q1 2021, with 2021 costs primarily reflected in discontinued operations[55] N-able Discontinued Operations Summary (Q1 2021) | Metric | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Total Revenue | $83,046 | | Operating income from discontinued operations | $9,140 | | Net income from discontinued operations, net of tax | $14,620 | 4. Goodwill Details the changes in the company's goodwill balance during the first quarter of 2022 | Metric | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Balance at December 31, 2021 | $3,308,405 | | Acquisitions | $5,422 | | Foreign currency translation and other adjustments | $(14,359) | | Balance at March 31, 2022 | $3,299,468 | 5. Fair Value Measurements Outlines the methodology for fair value measurements and reports the fair value of financial assets and liabilities - The company applies a three-tiered fair value hierarchy (Level 1, 2, 3) for financial assets and liabilities[43] - The carrying value of long-term debt approximates its estimated fair value due to adjustable interest rates[59] Money Market Funds (Level 1) | Asset | March 31, 2022 (Level 1) | December 31, 2021 (Level 1) | | :---------------- | :----------------------- | :------------------------ | | Money market funds | $475,000 | $645,000 | 6. Debt Provides details on the company's outstanding debt, including its First Lien Credit Agreement and interest rates - The company's First Lien Credit Agreement includes a $1.99 billion First Lien Term Loan due February 2024 and a $117.5 million Revolving Credit Facility due August 2023[61] - Borrowings bear floating interest rates (Eurodollar or base rate plus margin) with a 0.0% LIBOR floor; the First Lien Term Loan requires quarterly repayments of 0.25% of the original principal[63][64][66] - As of March 31, 2022, the company was in compliance with all covenants of the First Lien Credit Agreement[67] Debt Summary | Metric | March 31, 2022 | December 31, 2021 | | :------------------------------------ | :------------- | :---------------- | | First Lien Term Loan (principal) | $1,904,375 | $1,909,350 | | Effective Rate (First Lien Term Loan) | 3.21% | 2.85% | | Total debt | $1,887,910 | $1,890,669 | | Total long-term debt | $1,868,010 | $1,870,769 | 7. Earnings (Loss) Per Share Presents the calculation of basic and diluted earnings per share from continuing operations and for the total net loss - 9.6 million and 6.6 million weighted-average outstanding shares of common stock equivalents were excluded from diluted EPS computation for Q1 2022 and Q1 2021, respectively, due to their anti-dilutive effect[70] Earnings (Loss) Per Share Summary | Metric | 2022 | 2021 | | :------------------------------------------ | :--- | :--- | | Basic loss from continuing operations per share | $(0.03) | $(0.14) | | Basic loss per share | $(0.03) | $(0.05) | | Diluted loss from continuing operations per share | $(0.03) | $(0.14) | | Diluted loss per share | $(0.03) | $(0.05) | | Weighted-average common shares outstanding (basic) | 159,847 | 157,123 | 8. Income Taxes Details the components of the income tax benefit and explains the change in the effective tax rate - The decrease in the effective tax rate for Q1 2022 was primarily due to an excess tax deficiency from stock-based compensation, partially offset by an increase in permanent differences[71] - The company has accrued approximately $2.9 million in interest and penalties related to unrecognized tax benefits as of March 31, 2022[72] - The company is currently under examination by the IRS for tax years 2013-2016, by the Indian Tax Authority for 2017 and 2019, and by California and Texas state tax authorities for various periods[73] Income Tax Benefit Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | Effective Tax Rate 2022 | Effective Tax Rate 2021 | | :---------------------- | :------------------ | :------------------ | :-------------------- | :---------------------- | :---------------------- | | Income tax benefit | $(156) | $(4,880) | $4,724 | 3.2% | 18.3% | 9. Commitment and Contingencies Discloses expenses, lawsuits, investigations, and insurance coverage related to the Cyber Incident - The company incurred pretax gross expenses related to the Cyber Incident of $5.7 million in Q1 2022, down from $20.4 million (net $10.2 million after insurance) in Q1 2021[75][76] - Expenses for the Cyber Incident include investigation, remediation, legal, and professional services, with general and administrative expense presented net of insurance proceeds[77] - The company is subject to multiple lawsuits (consolidated class action, shareholder derivative actions) and investigations by domestic and foreign governmental authorities related to the Cyber Incident[78][80][81] - While losses from these proceedings are reasonably possible, the amount cannot be estimated due to the early stage of litigation and unspecified damages; such losses could be material[82] - SolarWinds maintains $15 million in cybersecurity insurance (renewed June 2021) and $50 million in D&O liability insurance; as of March 31, 2022, $15 million in cybersecurity insurance proceeds had been received[84] - In connection with the N-able spin-off, SolarWinds agreed to indemnify N-able for all liabilities related to the Cyber Incident, excluding certain specified expenses[85] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial condition and operating results for Q1 2022 compared to Q1 2021 Overview Describes SolarWinds' business as a leading provider of IT management software and its core operational strategies - SolarWinds is a leading provider of IT management software, offering solutions to monitor, manage, and optimize various IT infrastructures for organizations worldwide[89][90] - The company operates with a "customer-driven products with an 'inside-first' sales model" and aims to innovate and invest in product development to enhance functionality and integration[89][90] Spin-Off of N-able Business Details the completion of the N-able business separation and associated costs - The separation of the N-able business was completed on July 19, 2021, and its historical financial results are now reported as discontinued operations[92] - Spin-off costs were $0.2 million in Q1 2022 and $9.9 million in Q1 2021, with the majority of 2021 costs in discontinued operations; no significant spin-off costs are expected in 2022[93] Cyber Incident Discusses the ongoing remediation efforts, financial impact, and insurance coverage related to the Cyber Incident - The company continues extensive measures to investigate, contain, eradicate, and remediate the Cyber Incident, and is implementing enhanced security practices through its "Secure by Design" initiative[95] - The "Secure By Design" initiatives have increased ongoing expenses by approximately $20 million annually, primarily in research and development and general and administrative expenses[99] - The company expects to continue incurring legal and professional services costs related to ongoing and potential new claims, investigations, and customer support activities due to the Cyber Incident[101] - SolarWinds maintains $15 million in cybersecurity insurance (fully received as of March 31, 2022) and $50 million in D&O liability insurance[103] Cyber Incident Expenses | Metric | 2022 (in thousands) | 2021 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Pretax gross expenses | $5,700 | $20,400 | | Expected insurance proceeds (2021 only) | N/A | $10,200 | | Pretax net expenses (2021 only) | N/A | $10,200 | | Cost of recurring revenue (gross) | $200 | $800 | | Sales and marketing expense (gross) | $100 | $800 | | General and administrative expense (gross) | $5,500 | $18,800 | Impacts of COVID-19 Assesses the impact of the COVID-19 pandemic on the company's financial results and future outlook - While COVID-19 contributed to a decline in license revenue, the company does not expect a significant ongoing impact on financial results in future periods based on current conditions[105] - The longer-term impact remains uncertain due to factors like pandemic duration, virus variants, vaccine efficacy, and economic conditions[105] First Quarter Highlights Presents key performance indicators for the first quarter, including customer counts and annual recurring revenue Customers Reports the total number of customers and those with significant annual contract values - As of March 31, 2022, SolarWinds had over 300,000 customers (after N-able separation)[107] Customers with >$100,000 in Annual Contract Value | Year | Number of Customers | | :--- | :------------------ | | 2022 | 852 | | 2021 | 771 | Annual Recurring Revenue (ARR) Details the growth in subscription and total annual recurring revenue - Subscription ARR growth was driven by customers transitioning to subscription pricing and sales of database monitoring and service desk solutions; total ARR increased slightly due to Subscription ARR growth, offset by a decline in maintenance contracts due to lower license sales and Cyber Incident impacts[111] ARR Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Year-over-Year Growth (%) | | :------------------ | :------------------ | :------------------ | :------------------------ | | Subscription ARR | $141,840 | $108,911 | 30.2% | | Total ARR | $622,860 | $622,470 | 0.1% | Components of Our Results of Operations Explains the key line items in the company's income statement, including revenue, costs, and expenses Revenue Defines the different types of revenue and discusses expected trends - Revenue consists of recurring revenue (subscription and maintenance) and perpetual license revenue[113] - Subscription revenue is primarily from SaaS offerings and time-based license arrangements, recognized ratably or at a point in time upon delivery[115] - Maintenance revenue is from services associated with perpetual licenses, recognized ratably over the contract period[115] - License revenue is from sales of perpetual licenses, recognized at a point in time upon delivery of the electronic license key, including one year of maintenance[115] - The company expects a continued shift from license to recurring revenue as customers transition to subscription offerings, and license sales and maintenance renewal rates may fluctuate due to this shift and the Cyber Incident[114] Cost of Revenue Describes the components of cost of revenue, including support personnel and amortization of acquired technologies - Cost of recurring revenue includes technical support personnel, public cloud infrastructure, hosting fees, and allocated overhead; public cloud and hosting fees are expected to increase with subscription expansion[116] - Amortization of acquired technologies relates to capitalized costs from the Take Private transaction and other acquisitions[116] Operating Expenses Details the main categories of operating expenses and expected future trends - Operating expenses include sales & marketing, R&D, general & administrative, and amortization of acquired intangibles; personnel costs are the most significant component[115][117] - Total employees as of March 31, 2022, were 2,199, up from 2,074 (excluding N-able) as of March 31, 2021[117] - Operating expenses are expected to increase in absolute dollars due to long-term investments, increased selling efforts toward enterprise customers, and potential future acquisitions[118] - The N-able spin-off resulted in dis-synergies and increased overhead costs in 2021; stock-based compensation and travel costs are also expected to increase[118] Other Income (Expense) Explains the components of other income and expense, primarily interest and foreign currency impacts - Primarily consists of interest expense and foreign currency exchange gains/losses[119] - Interest expense may increase due to anticipated interest rate increases on variable-rate debt[119] Foreign Currency Discusses the company's exposure to foreign currency exchange rate movements - As a global company, SolarWinds is exposed to adverse movements in foreign currency exchange rates, impacting assets, liabilities, revenue, operating expenses, and cash flows[120] Income Tax Expense (Benefit) Describes the nature of income tax expense and factors affecting the effective tax rate - Income tax expense (benefit) is from domestic and foreign corporate income taxes[121] - The effective tax rate may decline over time as international income grows as a percentage of total income, but is subject to changes in tax laws, regulations, and income allocation[121] Comparison of the Three Months Ended March 31, 2022 and 2021 Provides a detailed comparative analysis of revenue, cost of revenue, and operating expenses for Q1 2022 versus Q1 2021 Revenue Analyzes the year-over-year changes in subscription, maintenance, and license revenue streams - Total revenue increased by 1.7% YoY; North America accounted for approximately 69% of total revenue in both periods[122] - Subscription revenue increased by 36.8% due to customer transitions to subscription models and sales of database monitoring solutions[124] - Maintenance revenue decreased by 4.3% due to decreased licensed product sales, customer transitions to subscriptions, and a decline in the maintenance renewal rate, primarily due to the Cyber Incident[126] - License revenue decreased by 9.0% due to increased subscription sales of products historically sold as perpetual licenses[129] Revenue by Type | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------- | :------------------ | :------------------ | :-------------------- | :------------- | | Subscription | $38,747 | $28,317 | $10,430 | 36.8% | | Maintenance | $115,495 | $120,665 | $(5,170) | -4.3% | | Total recurring revenue | $154,242 | $148,982 | $5,260 | 3.5% | | License | $22,626 | $24,874 | $(2,248) | -9.0% | | Total revenue | $176,868 | $173,856 | $3,012 | 1.7% | Net Retention Rate | Year | Net Retention Rate | | :--- | :----------------- | | 2022 | 96% | | 2021 | 96% | Maintenance Renewal Rate | Year | Maintenance Renewal Rate | | :--- | :----------------------- | | 2022 | 89% | | 2021 | 92% | Cost of Revenue Explains the decrease in total cost of revenue, driven by lower amortization of acquired technologies - Total cost of revenue decreased primarily due to a $23.2 million decrease in amortization of acquired technologies, as certain intangible assets from the Take Private transaction were fully amortized[130] - Cost of recurring revenue increased due to higher public cloud infrastructure and hosting fees ($2.5 million) and personnel costs ($0.3 million), partially offset by a decrease in Cyber Incident-related costs ($0.7 million)[130] Cost of Revenue Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------------- | :------------------ | :------------------ | :-------------------- | | Cost of recurring revenue | $17,831 | $15,654 | $2,177 | | Amortization of acquired technologies | $17,227 | $40,417 | $(23,190) | | Total cost of revenue | $35,058 | $56,071 | $(21,013) | Operating Expenses Breaks down the changes in sales, R&D, and administrative expenses between Q1 2022 and Q1 2021 - Sales and marketing expenses increased by $3.4 million (5.9%) due to higher personnel costs, marketing programs, and travel, partially offset by lower public relations costs related to the Cyber Incident[131] - Research and development expenses decreased by $2.9 million (11.1%) due to lower personnel costs and increased capitalized employee costs for the Observability platform, partially offset by increased contract services[132] - General and administrative expenses increased by $1.8 million (5.8%) due to higher personnel costs, increased insurance, and restructuring costs, partially offset by a decrease in Cyber Incident-related costs[133] - Amortization of acquired intangibles decreased by $0.8 million (5.7%) as certain intangibles were fully amortized and due to foreign currency exchange rate changes[134] Operating Expenses Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------------- | :------------------ | :------------------ | :-------------------- | | Sales and marketing | $61,044 | $57,666 | $3,378 | | Research and development | $23,422 | $26,358 | $(2,936) | | General and administrative | $32,664 | $30,865 | $1,799 | | Amortization of acquired intangibles | $13,239 | $14,038 | $(799) | | Total operating expenses | $130,369 | $128,927 | $1,442 | Interest Expense, Net Reports a slight decrease in net interest expense due to debt reduction - Interest expense, net, decreased slightly by $0.1 million (0.5%) due to a reduction in outstanding debt balance from quarterly principal repayments; the weighted-average effective interest rate was 2.9% for both periods[135] Interest Expense, Net Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------- | :------------------ | :------------------ | :-------------------- | | Interest expense, net | $(16,087) | $(16,174) | $87 | Other Income (Expense), Net Attributes the change in other income to foreign currency exchange rate impacts - Other income (expense), net, decreased by $0.8 million, primarily due to the impact of changes in foreign currency exchange rates[136] Other Income (Expense), Net Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------------- | :------------------ | :------------------ | :-------------------- | | Other income (expense), net | $(169) | $656 | $(825) | Income Tax Expense (Benefit) Explains the significant decrease in the effective tax rate compared to the prior year - The effective tax rate decreased to 3.2% from 18.3%, primarily due to an excess tax deficiency from stock-based compensation, partially offset by increased permanent differences[137] Income Tax Benefit Summary | Metric | 2022 (in thousands) | 2021 (in thousands) | Effective Tax Rate 2022 | Effective Tax Rate 2021 | | :---------------------- | :------------------ | :------------------ | :---------------------- | :---------------------- | | Income tax benefit | $(156) | $(4,880) | 3.2% | 18.3% | Discontinued Operations Confirms that the historical financial results of the N-able business are reported as discontinued operations - N-able's historical financial results through the July 19, 2021, Separation date are reflected as discontinued operations in the condensed consolidated financial statements[139] Non-GAAP Financial Measures from Continuing Operations Presents non-GAAP financial measures to provide additional insight into the company's operating performance Non-GAAP Revenue from Continuing Operations Reconciles GAAP revenue to non-GAAP revenue, noting the discontinuation of purchase accounting adjustments - Beginning in Q1 2022, the company no longer adjusts GAAP revenue for the impact of purchase accounting[142] Non-GAAP Revenue Reconciliation | Metric | 2022 (in thousands) | 2021 (in thousands) | | :-------------------- | :------------------ | :------------------ | | Total GAAP revenue | $176,868 | $173,856 | | Impact of purchase accounting | $0 | $79 | | Total non-GAAP revenue | $176,868 | $173,935 | Non-GAAP Operating Income and Non-GAAP Operating Margin from Continuing Operations Reconciles GAAP operating income to non-GAAP operating income by excluding certain non-cash and non-recurring items - Non-GAAP operating income excludes purchase accounting impact, amortization of acquired intangibles, stock-based compensation, acquisition and other costs, restructuring costs, and Cyber Incident costs[144] Non-GAAP Operating Income Reconciliation | Metric | 2022 (in thousands) | 2021 (in thousands) | | :------------------------------------------ | :------------------ | :------------------ | | GAAP operating income (loss) | $11,441 | $(11,142) | | Stock-based compensation expense and related employer-paid payroll taxes | $15,937 | $14,528 | | Amortization of acquired technologies | $17,227 | $40,417 | | Amortization of acquired intangibles | $13,239 | $14,038 | | Cyber Incident costs, net | $5,716 | $10,163 | | Non-GAAP operating income | $65,151 | $69,744 | | GAAP operating margin | 6.5% | (6.4)% | | Non-GAAP operating margin | 36.8% | 40.1% | Adjusted EBITDA and Adjusted EBITDA Margin from Continuing Operations Reconciles net loss to Adjusted EBITDA, a key measure of operating performance - Adjusted EBITDA is defined as net income or loss, excluding various non-cash and non-recurring items, and is used to assess operating performance[146] Adjusted EBITDA Reconciliation | Metric | 2022 (in thousands) | 2021 (in thousands) | | :------------------------------------------ | :------------------ | :------------------ | | Net loss from continuing operations | $(4,659) | $(21,780) | | Amortization and depreciation | $33,928 | $58,355 | | Interest expense, net | $16,087 | $16,174 | | Stock-based compensation expense and related employer-paid payroll taxes | $15,937 | $14,528 | | Cyber Incident costs, net | $5,716 | $10,163 | | Adjusted EBITDA | $68,790 | $72,950 | | Adjusted EBITDA margin | 38.9% | 41.9% | Liquidity and Capital Resources Discusses the company's cash position, debt, cash flows, and ability to meet future financial obligations Cash and cash equivalents Reports the company's cash balance and its distribution between domestic and international subsidiaries - International subsidiaries held approximately $34.9 million of cash and cash equivalents as of March 31, 2022, with 59.0% in Euros[149] - The company believes existing cash, operating cash flows, and borrowing capacity will be sufficient to fund operations, debt repayments, and capital expenditures for at least the next 12 months, despite Cyber Incident uncertainties[151] Cash and Cash Equivalents | Date | Amount (in thousands) | | :--------- | :-------------------- | | March 31, 2022 | $751,218 | | December 31, 2021 | $732,116 | Indebtedness Summarizes the company's total outstanding debt and available credit facility - As of March 31, 2022, the company had up to $117.5 million of available borrowings under its revolving credit facility[153] Total Debt | Date | Amount (in billions) | | :--------- | :------------------- | | March 31, 2022 | $1.9 | | December 31, 2021 | $1.91 | First Lien Credit Agreement Details the key terms of the company's primary credit facility, including loan amounts and repayment requirements - The First Lien Credit Agreement includes a $117.5 million senior secured revolving credit facility and a $1,990.0 million term loan facility[154] - The agreement allows for additional commitments for new incremental term loans and revolving loans, subject to certain baskets and leverage ratios[155] - The First Lien Term Loan requires equal quarterly repayments of 0.25% of the original principal amount[156] Summary of Cash Flows Provides a high-level overview of cash flows from operating, investing, and financing activities | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :-------------------------------------------------- | :------------------ | :------------------ | :-------------------- | | Net cash provided by operating activities from continuing operations | $40,258 | $15,965 | $24,293 | | Net cash used in investing activities from continuing operations | $(10,800) | $(3,868) | $(6,932) | | Net cash used in financing activities from continuing operations | $(9,629) | $(10,423) | $794 | | Net increase in cash and cash equivalents | $19,102 | $3,854 | $15,248 | Operating Activities Explains the increase in cash from operating activities, driven by changes in operating assets and liabilities - Cash provided by operating activities increased primarily due to decreased cash outflows from changes in operating assets and liabilities ($0.9 million outflow in Q1 2022 vs $37.9 million outflow in Q1 2021)[159] - Q1 2022 operating cash flow includes $5.0 million in insurance proceeds for Cyber Incident costs[159] - Cash paid for taxes was $6.3 million in Q1 2022, down from $14.4 million in Q1 2021[160] Investing Activities Details the increase in cash used for investing, primarily due to an acquisition and capitalized R&D costs - Net cash used in investing activities increased due to the acquisition of Monalytic, Inc and higher capitalized research and development costs for subscription-based offerings[162] Financing Activities Describes the use of cash in financing activities, including debt repayments and stock repurchases - Net cash used in financing activities decreased slightly due to reduced repurchases of common stock and incentive restricted stock, partially offset by lower proceeds from employee stock purchase plans[164] - The company withheld and retired $6.4 million (Q1 2022) and $8.4 million (Q1 2021) in common stock to satisfy tax requirements related to restricted stock unit settlements[165] - Quarterly principal payments of $5.0 million were made under the First Lien Credit Agreement in both Q1 2022 and Q1 2021[166] Contractual Obligations and Commitments Confirms no material changes to contractual obligations and off-balance sheet arrangements - No material changes to contractual obligations and commitments were reported since December 31, 2021[167] - The company had no relationships with unconsolidated organizations or financial partnerships for off-balance sheet arrangements during Q1 2022[168] Critical Accounting Policies and Estimates Reaffirms the key accounting estimates and policies from the 2021 Annual Report - Key accounting estimates include valuation of goodwill, intangibles, long-lived assets, contingent consideration, revenue recognition, stock-based compensation, income taxes, and loss contingencies[170] - No material changes to critical accounting policies and estimates have occurred since the Annual Report on Form 10-K for 2021[171] Goodwill Discusses the process and results of goodwill impairment testing - Goodwill is tested for impairment annually on October 1st or when circumstances indicate[172] - As of December 31, 2021, the fair value of the reporting unit exceeded its carrying value by 7.2%, with no impairment recognized[173] - Despite a further decline in market capitalization as of March 31, 2022, no impairment indicators were found, but future impairment charges are possible if cash flow assumptions are not met or stock price declines persist[174][175] Recent Accounting Pronouncements Refers to the financial statement notes for a description of recent accounting pronouncements - Refer to Note 2 Summary of Significant Accounting Policies for a full description of recent accounting pronouncements[176] Item 3. Quantitative and Qualitative Disclosures of Market Risk Outlines the company's exposure to interest rate and foreign currency exchange risks and its management strategies Interest Rate Risk Details the potential impact of interest rate fluctuations on the company's variable-rate debt - Cash and cash equivalents were $751.2 million (March 31, 2022) and $732.1 million (December 31, 2021), primarily in highly liquid investments with maturities of three months or less, posing no material market risk[177][178] - Total indebtedness was $1.90 billion (March 31, 2022) and $1.91 billion (December 31, 2021), with variable interest rates[179] - A hypothetical 100 basis point increase in interest rates would result in an approximate $19.1 million annual increase in interest expense[180] Foreign Currency Exchange Risk Explains the company's exposure to currency fluctuations from its international business operations - The company is exposed to foreign currency exchange rate fluctuations, primarily involving the Euro, British Pound Sterling, and Australian Dollar against the USD, due to international business operations[182] - Fluctuations impact assets, liabilities, revenue, operating expenses, and cash flows upon translation into USD, with international revenue and expenses primarily flowing through European subsidiaries with Euro functional currency[183] Foreign Currency Transaction Risk Describes risks arising from transactions denominated in foreign currencies and the use of hedging instruments - Foreign currency exposures arise from multi-currency maintenance contracts and subscriptions, accounts receivable, and intercompany transactions[185] - The company uses purchased foreign currency forward contracts to minimize foreign exchange exposure on certain balance sheet positions, but had no outstanding contracts as of March 31, 2022, and December 31, 2021[186] Foreign Currency Translation Risk Discusses the impact of translating foreign subsidiary financial statements into U.S. dollars - Fluctuations in foreign currencies impact the USD reported amounts of assets, liabilities, revenue, operating expenses, and cash flows for foreign subsidiaries[188] - A strengthening USD reduces reported amounts for international operations, while a weakening USD increases them, leading to remeasurement gains/losses in income or translation gains/losses in accumulated other comprehensive income (loss)[189] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and notes no material changes in internal financial reporting controls Evaluation of Disclosure Controls and Procedures States management's conclusion on the effectiveness of the company's disclosure controls and procedures - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2022[191] Changes in Internal Control over Financial Reporting Reports that no material changes were made to internal controls over financial reporting during the quarter - No changes in internal control over financial reporting occurred during Q1 2022 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[192] PART II - OTHER INFORMATION Item 1. Legal Proceedings Addresses ongoing litigation and investigations related to the Cyber Incident and other ordinary course legal matters - For details on lawsuits and government investigations related to the Cyber Incident, refer to Item 2 and Note 9 of the financial statements[195] - While other ordinary course litigation exists, it is not expected to have a material adverse effect on the company's financial condition, results of operations, or cash flows[196] Item 1A. Risk Factors Confirms no material changes to the risk factors disclosed in the 2021 Annual Report on Form 10-K - No material changes to risk factors have occurred since those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021[197] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports on the repurchase of unvested restricted stock from employees during the quarter - All repurchases relate to unvested restricted stock from employees, exercised by the company's right of repurchase, and are not part of a publicly announced plan or program[198] Stock Repurchases | Period | Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan or Program (in thousands) | | :--------------- | :------------------------- | :--------------------------- | :----------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------- | | March 1-31, 2022 | 3,600 | $3.39 | — | — | Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including corporate governance documents and required certifications - The exhibit index includes the Third Amended and Restated Certificate of Incorporation, Certificate of Amendment, Amended and Restated Bylaws, CEO and CFO certifications (31.1, 31.2, 32.1), and Interactive Data Files (101, 104)[201] Signatures Confirms the report's authorization by the Chief Financial Officer on May 6, 2022 - The report was signed by J Barton Kalsu, Chief Financial Officer, on May 6, 2022[205] Certifications Notes the inclusion of required CEO and CFO certifications attesting to the report's accuracy - Certifications of the Chief Executive Officer and Chief Financial Officer are filed as Exhibit 31.1, 31.2, and 32.1, with Exhibit 32.1 being furnished, not filed, and not incorporated by reference into other filings[201]