solarwinds(SWI) - 2022 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the company's unaudited condensed consolidated financial statements and accompanying notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $722,440 | $732,116 | | Short-term investments | $55,768 | — | | Total current assets | $885,974 | $858,840 | | Goodwill | $2,642,388 | $3,308,405 | | Total assets | $4,078,561 | $4,792,127 | | Liabilities & Equity | | | | Total current liabilities | $411,991 | $413,877 | | Long-term debt, net of current portion | $1,865,270 | $1,870,769 | | Total liabilities | $2,460,754 | $2,504,231 | | Total stockholders' equity | $1,617,807 | $2,287,896 | | Total liabilities and stockholders' equity | $4,078,561 | $4,792,127 | - Goodwill decreased significantly from $3,308,405 thousand to $2,642,388 thousand, primarily due to a $612.4 million impairment charge[17][71] - Total stockholders' equity decreased from $2,287,896 thousand to $1,617,807 thousand, largely driven by the net loss and foreign currency translation adjustments[17][24] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $176,034 | $176,788 | $352,902 | $350,644 | | Gross profit | $156,926 | $120,962 | $298,736 | $238,747 | | Operating loss | $(596,578) | $(7,546) | $(585,137) | $(18,688) | | Net loss | $(622,124) | $(11,624) | $(626,783) | $(18,784) | | Basic loss per share | $(3.87) | $(0.07) | $(3.91) | $(0.12) | - Total revenue remained relatively stable year-over-year for both the three and six-month periods ended June 30, 2022[19][139][157] - The company reported a significant increase in net loss, primarily driven by a $612.4 million goodwill impairment charge recognized in the second quarter of 2022[19][43][152][168] Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(622,124) | $(11,624) | $(626,783) | $(18,784) | | Foreign currency translation adjustment | $(53,670) | $17,645 | $(70,565) | $(48,105) | | Unrealized losses on investments, net of tax | $(152) | — | $(152) | — | | Other comprehensive income (loss) | $(53,822) | $17,645 | $(70,717) | $(48,105) | | Comprehensive income (loss) | $(675,946) | $6,021 | $(697,500) | $(66,889) | - Comprehensive loss widened significantly in 2022 due to the increased net loss and substantial negative foreign currency translation adjustments[21][140] Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Balance at Dec 31, 2021 | Balance at June 30, 2022 | | :--- | :--- | :--- | | Common Stock (Amount) | $159 | $161 | | Additional Paid-in Capital | $2,566,783 | $2,594,192 | | Accumulated Other Comprehensive Income (Loss) | $1,306 | $(69,411) | | Accumulated Deficit | $(280,352) | $(907,135) | | Total Stockholders' Equity | $2,287,896 | $1,617,807 | - Total stockholders' equity decreased by $670,089 thousand from December 31, 2021, to June 30, 2022, due to a net loss and foreign currency translation adjustments[24][25] - Stock-based compensation contributed $33,276 thousand to additional paid-in capital for the six months ended June 30, 2022[24] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities from continuing operations | $81,440 | $48,213 | | Net cash used in investing activities from continuing operations | $(73,426) | $(6,491) | | Net cash used in financing activities from continuing operations | $(16,081) | $(16,479) | | Net cash provided by discontinued activities | — | $18,347 | | Net increase (decrease) in cash and cash equivalents | $(9,676) | $40,137 | | Cash and cash equivalents, End of period | $722,440 | $410,635 | - Net cash from operating activities increased to $81,440 thousand, primarily due to changes in operating assets and liabilities and $5.0 million in Cyber Incident insurance proceeds[28][196] - Net cash used in investing activities increased to $73,426 thousand, mainly due to $55.9 million in short-term investments purchases and an acquisition[28][198] Notes to the Condensed Consolidated Financial Statements 1. Organization and Nature of Operations - SolarWinds Corporation is a leading provider of IT management software for hybrid IT environments[30] - The company completed the spin-off of its N-able business on July 19, 2021, with N-able's results now reported as discontinued operations[31] 2. Summary of Significant Accounting Policies - The company early adopted ASU No 2021-08 for business combination accounting, which did not materially impact financial statements[38] - A $612.4 million non-cash goodwill impairment charge was recognized due to a decline in market capitalization and lowered projected operating results[42][43] - A $9.4 million non-cash impairment charge was recorded for the SolarWinds trade name as of June 30, 2022[47] Amortization of Acquired Technologies (in thousands) | Period | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Acquired license technologies | $921 | $37,328 | $15,404 | $74,664 | | Acquired subscription technologies | $2,727 | $2,770 | $5,471 | $5,851 | | Total amortization | $3,648 | $40,098 | $20,875 | $80,515 | - Amortization of acquired license technologies significantly decreased in 2022 as certain intangible assets became fully amortized[62] 3. Discontinued Operations - The N-able business results are presented as discontinued operations for periods up to its separation on July 19, 2021[64] N-able Discontinued Operations (in thousands) | Metric | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Total revenue | $85,186 | $168,232 | | Operating income | $10,837 | $19,977 | | Net income from discontinued operations, net of tax | $10,261 | $24,881 | - Spin-off costs related to the Separation were $0.2 million for H1 2022, down from $23.1 million in the prior year period[66] 4. Investments - As of June 30, 2022, SolarWinds held $55.8 million in short-term available-for-sale securities[67][70] Short-term Investments as of June 30, 2022 (in thousands) | Type | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | :--- | :--- | :--- | :--- | :--- | | U.S. Treasury securities | $23,958 | $— | $(72) | $23,886 | | Corporate bonds | $22,034 | $10 | $(121) | $21,923 | | Commercial paper | $8,959 | $— | $— | $8,959 | | Asset-backed securities | $1,003 | $— | $(3) | $1,000 | | Total | $55,954 | $10 | $(196) | $55,768 | 5. Goodwill Changes in Goodwill (in thousands) | Metric | Amount | | :--- | :--- | | Balance at December 31, 2021 | $3,308,405 | | Acquisitions | $5,415 | | Goodwill impairment | $(612,395) | | Foreign currency translation and other adjustments | $(59,037) | | Balance at June 30, 2022 | $2,642,388 | - Goodwill decreased by $666,017 thousand during H1 2022, primarily due to a $612.4 million impairment charge and negative foreign currency adjustments[71] 6. Fair Value Measurements Fair Value Measurements at June 30, 2022 (in thousands) | Asset Type | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Money market funds | $361,055 | — | — | $361,055 | | U.S. Treasury securities | — | $31,380 | — | $31,380 | | Corporate bonds | — | $23,707 | — | $23,707 | | Commercial paper | — | $42,805 | — | $42,805 | | Asset-backed securities | — | $1,000 | — | $1,000 | | Total assets | $361,055 | $98,892 | — | $459,947 | - The company recognized non-recurring impairment charges of $612.4 million for goodwill and $9.4 million for its trade name, classified as Level 3 fair value measurements[75] 7. Debt Debt Summary (in thousands, except interest rates) | Metric | June 30, 2022 | Effective Rate | December 31, 2021 | Effective Rate | | :--- | :--- | :--- | :--- | :--- | | First Lien Term Loan | $1,899,400 | 4.42% | $1,909,350 | 2.85% | | Total principal amount | $1,899,400 | | $1,909,350 | | | Total debt | $1,885,170 | | $1,890,669 | | | Long-term debt, net of current portion | $1,865,270 | | $1,870,769 | | - The First Lien Term Loan's effective interest rate increased from 2.85% to 4.42% at June 30, 2022[77] - The company was in compliance with all debt covenants as of June 30, 2022[82] 8. Earnings (Loss) Per Share Basic and Diluted Loss Per Share (in thousands, except per share) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss from continuing operations | $(622,124) | $(21,885) | $(626,783) | $(43,665) | | Basic loss from continuing operations per share | $(3.87) | $(0.14) | $(3.91) | $(0.28) | | Diluted loss from continuing operations per share | $(3.87) | $(0.14) | $(3.91) | $(0.28) | | Weighted-average shares used in basic EPS | 160,663 | 157,854 | 160,257 | 157,491 | | Total anti-dilutive shares excluded | 12,594 | 7,071 | 11,074 | 6,613 | - Basic and diluted loss per share from continuing operations significantly increased to $(3.87) for Q2 and $(3.91) for H1 2022, primarily due to the goodwill impairment charge[19][84] 9. Income Taxes Income Tax Expense (Benefit) and Effective Tax Rate | Period | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Income tax expense (benefit) | $7,871 | $(2,121) | $7,715 | $(7,001) | | Effective tax rate | (1.3)% | 8.8% | (1.2)% | 13.8% | - The effective tax rate decreased significantly to (1.2)% for H1 2022, primarily due to the non-deductible goodwill impairment charge[87] - The company increased its valuation allowance for deferred tax assets during the second quarter of 2022[89] 10. Commitment and Contingencies - Pretax gross expenses related to the Cyber Incident were $3.7 million for Q2 2022 and $9.5 million for H1 2022, a decrease from the prior year[92][93] - The company is subject to multiple lawsuits and government investigations related to the Cyber Incident[95][97][98] - SolarWinds maintains $15 million in cybersecurity insurance and has received $15 million in proceeds as of June 30, 2022[101] - SolarWinds indemnifies N-able for liabilities related to the Cyber Incident under the separation agreement[102] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial performance, operational highlights, and key business factors Overview - SolarWinds is a leading provider of IT management software, focusing on an 'inside-first' sales model for hybrid IT environments[106] - The company aims to innovate and invest in its product portfolio across network, systems, applications, and IT service desks[107] Spin-Off of N-able Business - The spin-off of the N-able business was completed on July 19, 2021, and its historical results are reported as discontinued operations[109] - Spin-off costs decreased significantly to $0.2 million for H1 2022 from $23.1 million in the prior year[110] Cyber Incident - SolarWinds continues extensive remediation measures, including its 'Secure by Design' initiative[112] - Pretax gross expenses related to the Cyber Incident were $9.5 million for H1 2022, compared to $34.0 million in H1 2021[113][114] - Ongoing 'Secure By Design' initiatives have increased annual expenses by approximately $20 million[115] - The company expects to incur additional legal and professional costs and is subject to multiple lawsuits and investigations[116][117] - SolarWinds maintains $15 million in cybersecurity insurance and $50 million in D&O liability insurance[119] Impacts of COVID-19 - The company does not expect a significant ongoing impact on financial results from the COVID-19 pandemic based on current conditions[120] Impacts of Macroeconomic Conditions - Foreign currency fluctuations, inflation, and interest rate changes have negatively impacted financial results and may continue to do so[121][140] - The suspension of business in Russia and Belarus is not expected to have a material impact on financial results[121] Second Quarter Highlights Customers - As of June 30, 2022, SolarWinds had over 300,000 customers, with 879 spending over $100,000 annually, up from 775 in the prior year[123] Annual Recurring Revenue (ARR) Annual Recurring Revenue (in thousands, except percentages) | Metric | June 30, 2022 | June 30, 2021 | Year-over-Year Growth | | :--- | :--- | :--- | :--- | | Subscription ARR | $148,277 | $119,189 | 24.4% | | Total ARR | $625,496 | $621,072 | 0.7% | - Subscription ARR grew by 24.4% year-over-year, driven by sales of subscription offerings and customer transitions[126][128] - Total ARR increased slightly by 0.7%, with subscription growth partially offset by a decline in maintenance contracts[126][128] Components of Our Results of Operations - Revenue consists of recurring (subscription and maintenance) and perpetual license revenue, with a planned shift towards subscriptions[129][131] - Operating expenses are expected to increase due to long-term investments and dis-synergies from the N-able separation[134] - Interest expense is expected to continue increasing due to anticipated interest rate hikes on variable-rate debt[135] Comparison of the Three Months Ended June 30, 2022 and 2021 Revenue (in thousands, except percentages) | Revenue Type | Q2 2022 Amount | Q2 2022 % of Revenue | Q2 2021 Amount | Q2 2021 % of Revenue | Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Subscription | $36,980 | 21.0% | $29,608 | 16.7% | $7,372 | | Maintenance | $113,972 | 64.8% | $120,502 | 68.2% | $(6,530) | | Total recurring | $150,952 | 85.8% | $150,110 | 84.9% | $842 | | License | $25,082 | 14.2% | $26,678 | 15.1% | $(1,596) | | Total revenue | $176,034 | 100.0% | $176,788 | 100.0% | $(754) | - Total revenue decreased by $0.8 million (0.4%) due to lower license and maintenance revenue, offset by a 24.9% increase in subscription revenue[139][141] - Subscription net retention rate was 97% for the trailing twelve months ended June 30, 2022[142] - Maintenance revenue decreased by 5.4% due to decreased license sales, customer transitions, and foreign currency impact[143][144] Operating Expenses (in thousands, except percentages) | Expense Type | Q2 2022 Amount | Q2 2022 % of Revenue | Q2 2021 Amount | Q2 2021 % of Revenue | Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $64,615 | 36.7% | $58,076 | 32.9% | $6,539 | | Research and development | $22,108 | 12.6% | $25,831 | 14.6% | $(3,723) | | General and administrative | $41,283 | 23.5% | $30,719 | 17.4% | $10,564 | | Amortization of acquired intangibles | $13,103 | 7.4% | $13,882 | 7.8% | $(779) | | Goodwill impairment | $612,395 | 347.9% | — | — | $612,395 | | Total operating expenses | $753,504 | 428.0% | $128,508 | 72.7% | $624,996 | - General and administrative expenses increased by 34.4% due to a $9.4 million trade name impairment charge and higher personnel costs[150] - Interest expense, net, increased by 13.6% due to higher interest rates on debt[153] - Income tax expense was $7.9 million (effective rate of -1.3%) in Q2 2022, primarily due to the non-deductible goodwill impairment[155] Comparison of the Six Months Ended June 30, 2022 and 2021 Revenue (in thousands, except percentages) | Revenue Type | H1 2022 Amount | H1 2022 % of Revenue | H1 2021 Amount | H1 2021 % of Revenue | Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Subscription | $75,727 | 21.5% | $57,925 | 16.5% | $17,802 | | Maintenance | $229,467 | 65.0% | $241,167 | 68.8% | $(11,700) | | Total recurring | $305,194 | 86.5% | $299,092 | 85.3% | $6,102 | | License | $47,708 | 13.5% | $51,552 | 14.7% | $(3,844) | | Total revenue | $352,902 | 100.0% | $350,644 | 100.0% | $2,258 | - Total revenue increased by $2.3 million (0.6%) for H1 2022, driven by a 30.7% increase in subscription revenue[157][158] - Maintenance revenue decreased by 4.9% due to lower license sales, customer transitions, and foreign currency impacts[159] Operating Expenses (in thousands, except percentages) | Expense Type | H1 2022 Amount | H1 2022 % of Revenue | H1 2021 Amount | H1 2021 % of Revenue | Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $125,659 | 35.6% | $115,742 | 33.0% | $9,917 | | Research and development | $45,530 | 12.9% | $52,189 | 14.9% | $(6,659) | | General and administrative | $73,947 | 21.0% | $61,584 | 17.6% | $12,363 | | Amortization of acquired intangibles | $26,342 | 7.5% | $27,920 | 7.9% | $(1,578) | | Goodwill impairment | $612,395 | 173.5% | — | — | $612,395 | | Total operating expenses | $883,873 | 250.5% | $257,435 | 73.4% | $626,438 | - General and administrative expenses increased by 20.1% due to a $9.4 million trade name impairment and higher personnel costs[166] - Income tax expense was $7.7 million (effective rate of -1.2%) in H1 2022, primarily due to the non-deductible goodwill impairment[171] Non-GAAP Financial Measures from Continuing Operations - SolarWinds uses non-GAAP measures like Non-GAAP Operating Income and Adjusted EBITDA to supplement its GAAP results[174][178][182] Non-GAAP Operating Income and Margin (in thousands, except percentages) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | GAAP operating loss | $(596,578) | $(7,546) | $(585,137) | $(18,688) | | Non-GAAP operating income | $63,347 | $72,896 | $128,498 | $142,640 | | Non-GAAP operating margin | 36.0% | 41.2% | 36.4% | 40.7% | Adjusted EBITDA and Margin (in thousands, except percentages) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss from continuing operations | $(622,124) | $(21,885) | $(626,783) | $(43,665) | | Adjusted EBITDA | $66,824 | $76,726 | $135,614 | $149,676 | | Adjusted EBITDA margin | 38.0% | 43.4% | 38.4% | 42.7% | Liquidity and Capital Resources - Cash, cash equivalents, and short-term investments totaled $778.2 million as of June 30, 2022[186] - The company believes existing cash and operating cash flows are sufficient to fund operations for at least the next 12 months[187] - Total indebtedness was $1.9 billion as of June 30, 2022, with $117.5 million available under the revolving credit facility[189] Summary of Cash Flows (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities from continuing operations | $81,440 | $48,213 | | Net cash used in investing activities from continuing operations | $(73,426) | $(6,491) | | Net cash used in financing activities from continuing operations | $(16,081) | $(16,479) | | Net increase (decrease) in cash and cash equivalents | $(9,676) | $40,137 | - Net cash provided by operating activities increased due to changes in operating assets and liabilities, including $5.0 million in insurance proceeds[196] - Net cash used in investing activities increased significantly due to $55.9 million in short-term investments and an acquisition[198] Critical Accounting Policies and Estimates - Key accounting estimates include valuation of goodwill, intangibles, revenue recognition, and loss contingencies[206] - An interim goodwill impairment assessment resulted in a $612.4 million non-cash charge, using income and market approaches with an 11.5% discount rate[209][210] - A $9.4 million non-cash impairment charge was recorded for the SolarWinds trade name, using a relief from royalty method[213] Item 3. Quantitative and Qualitative Disclosures of Market Risk This section details the company's exposure to market risks, primarily interest rate and foreign currency fluctuations Interest Rate Risk - The company held $722.4 million in cash and cash equivalents and $55.8 million in short-term investments with minimal market risk[216][217] - Total indebtedness was $1.90 billion with variable interest rates; a hypothetical 100 basis point increase would impact annual interest expense by $19.1 million[218] Foreign Currency Exchange Risk - SolarWinds is exposed to foreign currency fluctuations, primarily in the Euro, British Pound Sterling, and Australian Dollar[220] - The company uses foreign currency forward contracts to minimize exposure but had no outstanding contracts as of June 30, 2022[224][225] - Currency fluctuations impact the translation of foreign subsidiaries' financial statements into USD[227] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures as of the reporting date - As of June 30, 2022, disclosure controls and procedures were deemed effective at a reasonable assurance level by management[228][229] - There were no material changes in internal control over financial reporting during the quarter ended June 30, 2022[230] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section outlines ongoing lawsuits and government investigations related to the Cyber Incident - The company is involved in lawsuits and government investigations related to the Cyber Incident, as detailed in Note 10 and Item 2[233] - While other legal proceedings may arise, none are currently considered material, though outcomes are uncertain[234] Item 1A. Risk Factors This section updates key risk factors, focusing on cybersecurity vulnerabilities and the Cyber Incident's impact - The primary updated risk factor concerns cybersecurity and the Cyber Incident, emphasizing ongoing vulnerabilities and potential harms[235][236][239] - Cyberattacks can lead to system compromises, theft of information, operational interference, and exposure to legal liabilities[236][237][239] - The company's cybersecurity insurance coverage of $15 million may not be sufficient for all liabilities[239] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on issuer repurchases of equity securities from employees during the quarter Issuer Purchases of Equity Securities (in thousands, except per share) | Period | Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | | :--- | :--- | :--- | :--- | | April 1-30, 2022 | — | $— | — | | May 1-31, 2022 | — | $— | — | | June 1-30, 2022 | 6,750 | $4.00 | — | | Total | 6,750 | | — | - All repurchases relate to employee-held restricted stock and were not part of a publicly announced program[240] Item 6. Exhibits This section lists all exhibits filed with the quarterly report, including certifications and corporate documents - Exhibits include the Certificate of Incorporation, Bylaws, and certifications from the CEO and CFO[243] - Certifications are filed as required by the Exchange Act Rules and the Sarbanes-Oxley Act[243] Signatures This section contains the official signature certifying the filing of the report on behalf of the company - The report is signed by J Barton Kalsu, Chief Financial Officer, on August 5, 2022[247]