solarwinds(SWI) - 2020 Q4 - Annual Report

Introductory Information This section provides an introductory note on the Cyber Incident and a disclaimer regarding forward-looking statements Introductory Note: Cyber Incident SolarWinds disclosed a cyberattack on its Orion platform in December 2020, involving malicious code and affecting a limited number of customers - SolarWinds announced a cyberattack on its Orion Software Platform and internal systems on December 14, 2020, involving malicious code (Sunburst) injected into builds released between March and June 2020[11][12] - Remediations have been released, and proprietary code was shared to validate a "kill-switch" for Sunburst[13] - The company believes fewer than 18,000 customers installed an affected version of the Orion Software Platform, and substantially fewer were exploited by threat actors[14] - The cyberattack is widely reported as a sophisticated nation-state level operation, and SolarWinds is implementing a "Secure by Design" initiative to enhance security measures[15][16] Special Note Regarding Forward-Looking Statements This section disclaims forward-looking statements, noting actual results may differ due to risks, and defines key terms - The report contains forward-looking statements subject to known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially[18][19] - Readers are cautioned not to place undue reliance on these statements, which represent management's beliefs and assumptions only as of the report date[19] - Key forward-looking statements include expectations regarding financial performance, the impact of the Cyber Incident, product development, acquisitions, hiring, international operations, capital expenditures, COVID-19 impact, and the potential spin-off of the MSP business[20] PART I This part details the company's business operations, associated risk factors, property information, legal proceedings, and other statutory disclosures Item 1. Business SolarWinds provides IT infrastructure management software using a high-velocity sales model, focusing on innovation, acquisitions, and international growth - SolarWinds is a leading provider of IT infrastructure management software, enabling organizations to monitor and manage IT environments across on-premises, cloud, and hybrid models[22] - The company employs a "SolarWinds Model" characterized by powerful, scalable, affordable, easy-to-use products combined with a high-velocity, low-touch sales approach[22][24] - Revenue is derived from subscription (MSP, application performance management, IT service management) and license/maintenance sales, with a strategic focus on growing recurring revenue[29] Overview SolarWinds offers IT management software via a high-velocity sales model, focusing on user needs and growing recurring revenue through innovation - SolarWinds offers a comprehensive portfolio of Core IT Management products for ITOps, DevOps, and IT security professionals, and cloud-based solutions for Managed Service Providers (MSPs) serving Small and Medium-sized Enterprises (SMEs)[23] - The company's marketing and sales strategy is a digital, direct inside sales approach, leveraging online communities like THWACK and MSP Institute to engage with technology professionals[26][27] - Revenue is primarily from subscription (MSP, application performance management, ITSM) and license/maintenance, with subscription and maintenance revenue significantly increasing over time[29] Cyber Incident This section briefly notes the December 2020 cyberattack on the Orion platform, with further details in other 10-K sections - The company announced a cyberattack on its Orion Software Platform and internal systems on December 14, 2020[31] - Further details on the Cyber Incident, including risks, financial condition, results of operations, and legal proceedings, are provided in Item 1A, Item 7, and Note 16 of the consolidated financial statements[31] Potential Spin-Off of MSP Business SolarWinds is exploring a tax-free spin-off of its MSP business into a separate public company, targeted for Q2 2021 - SolarWinds is exploring a potential spin-off of its MSP business into a newly created and separately traded public company, with a Form 10 registration statement confidentially submitted to the SEC[32] - The spin-off aims to allow each company (standalone MSP and Core IT Management) to pursue distinct operating priorities, strategies, and capital allocation policies[32] - If completed, the transaction is intended to be a tax-free, pro-rata distribution to all SolarWinds stockholders, targeted for the second quarter of 2021[32] The SolarWinds Model The SolarWinds Model emphasizes user-centric, affordable products, efficient digital marketing, inside sales, and strong customer relationships - The model focuses on understanding technology professionals' daily challenges through engagement via online communities like THWACK and MSP Institute[33] - Products are designed to be easy to access, try, buy, deploy, and use, built on common platforms for modular expansion, serving businesses from small to large enterprises[34][35] - Sales are conducted through a "selling from the inside" approach, a prescriptive, metrics-based process that efficiently handles transactions without an outside sales force or professional services[38][39] Growth Strategies Growth strategies include new customer acquisition, increased product penetration, international expansion, continuous innovation, new market entry, and strategic acquisitions - Key growth elements include winning new customers, increasing penetration within the existing customer base by selling additional products and upgrades, and expanding internationally[41][42][43] - The company plans to continue innovating by bringing new products and tools to market, enhancing existing products, and improving overall product integration[44] - Strategic expansion includes entering new markets where the SolarWinds Model provides competitive advantages and pursuing targeted acquisitions that complement the product portfolio or provide access to new markets[45][46] Our Customers and Market SolarWinds serves over 320,000 customers in a complex IT market, capitalizing on demand for hybrid IT management solutions Customer Base as of December 31, 2020 | Metric | Count | | :-------------------------------- | :------ | | Total Customers | >320,000 | | MSP Customers | >25,000 | | SMEs Served by MSPs | >500,000 | - The IT market faces growing complexity due to mixed on-premises, public, private, and hybrid IT environments, requiring comprehensive performance monitoring and management[50][51] - Technology professionals are increasingly influential in software purchasing decisions, preferring to trial products and select solutions tailored to specific challenges, highlighting limitations of expensive, complex, and inflexible alternative solutions[52][55][56] Product Portfolio and Technology Platforms SolarWinds provides a broad, integrated product portfolio for IT infrastructure management, including Core IT and MSP solutions - The product portfolio covers network, systems, desktop, application, storage, database, website infrastructures, and IT service desks, with a focus on innovation and integration[57][58] - Core IT Management products provide hybrid IT performance management for ITOps, DevOps, and IT Security professionals, offering deep visibility across the IT stack[59] - MSP products, rebranded as "N-able" in Q1 2021, offer integrated solutions for remote monitoring and management, security and data protection, and business management for SME end customers[65][66] Marketing and Sales SolarWinds uses a low-touch, high-velocity digital marketing and inside sales strategy, supported by online communities and channel partners - The company's marketing and sales strategy is a low-touch, high-velocity digital approach, targeting network, systems, DevOps, and MSP professionals[69][70] - Marketing efforts focus on driving website traffic and high-quality leads through digital tools and online communities (THWACK, MSP Institute) that educate and connect with technology professionals[71][72][73] - The sales organization operates "from the inside," using a prescriptive, metrics-based approach for new sales and maintenance renewals, and leverages channel partners for broader market reach, including government sales[74][75][76][78] Research and Development R&D focuses on new product development, integration, and security via a "Secure by Design" framework and global scrum teams - The R&D organization focuses on design, development, testing, and deployment of new products and improvements, ensuring product integration and complementarity[79] - A new "Secure by Design" framework is being implemented to enhance security across internal environments, software development processes, and product deployment[79] - The company engages its user community in the development process and employs a cost-efficient global development model with small scrum teams for rapid and high-quality software releases[80][81][82] Competition SolarWinds faces intense competition from large vendors and specialized firms, with key factors including product capabilities and customer success - The company operates in a highly competitive industry characterized by constant change and innovation, driven by evolving customer requirements[83] - Principal competitive factors include brand awareness, product capabilities (scalability, performance, security, reliability), ease of use, total cost of ownership, flexible deployment models, sales and marketing efforts, and customer success[83] - Competitors include large network management and IT vendors (e.g., Cisco Systems, MicroFocus, IBM, BMC Software) and smaller companies in cloud/application monitoring and MSP IT tools markets[83] Intellectual Property SolarWinds protects IP via patents, copyrights, and trade secrets, but enforcement is challenging and costly - SolarWinds relies on patent, copyright, trademark, trade dress, trade secret laws, confidentiality procedures, and contractual restrictions to protect its proprietary rights[85] Issued Patents as of December 31, 2020 | Type | Count | | :---------------- | :---- | | Issued U.S. Patents | 38 | | Issued Foreign Patents | 194 | | Pending Applications | 66 | - Protection is limited, as patents may be challenged or circumvented, and enforcement can be difficult and costly, especially in countries with less protective intellectual property laws[85][86][87] Human Capital Management SolarWinds had 3,340 global employees as of December 31, 2020, prioritizing a people-centric culture and talent development Employee Count as of December 31, 2020 | Location | Count | | :---------------- | :---- | | Total Employees | 3,340 | | United States | 1,191 | | Outside United States | 2,149 | - The company emphasizes a people-centric approach, valuing its talented and diverse global workforce across various functions[88][90] - SolarWinds invests in attracting top talent, training, development initiatives, and retaining high-potential employees, recognizing their strong values and passion as key to achieving company goals[91] Additional Information SEC filings, including 10-K, 10-Q, and 8-K reports, are available on the company's investor relations website and the SEC's website - The company's website (www.solarwinds.com) provides access to SEC filings, including 10-K, 10-Q, and 8-K reports, free of charge[92] - The SEC's website (http://www.sec.gov) also contains reports and other information regarding issuers that file electronically[92] Item 1A. Risk Factors This section details significant risks to common stock investment, including cybersecurity, business, spin-off, regulatory, and financial factors - The Cyber Incident poses significant risks, including system compromises, data theft, operational interference, legal liabilities, reputational harm, increased costs, and negative impacts on sales and renewals[99][104] - Business and industry risks include fluctuating financial results, dependence on digital marketing, challenges in customer acquisition and retention, impacts of the COVID-19 pandemic, and risks associated with international operations and competition[109][113][117][122][125][131] - Other notable risks involve the potential spin-off of the MSP business (which may not achieve anticipated benefits or could incur tax liabilities), compliance with global data privacy and export control regulations, intellectual property protection challenges, substantial indebtedness, and potential volatility in the company's stock price[96][97][162][168][174][189][211] Summary of Risk Factors This section summarizes principal risks for common stock investment, directing readers to detailed discussions within the "Risk Factors" section - The summary highlights principal factors making an investment in common stock speculative or risky, including cybersecurity, business and industry, potential spin-off, government regulation, intellectual property, indebtedness, accounting and taxation, common stock ownership, and organizational structure[93][94][95][96][97][98] Risks Related to Cybersecurity and the Cyber Incident The Cyber Incident caused severe impacts, including system compromises, data theft, legal actions, and reputational harm, with uncertain future costs - Cyberattacks, including the Cyber Incident, can lead to compromises of systems, insertion of malicious code, theft of proprietary information, operational interference, and significant legal and financial liabilities[99][100][102] - The Cyber Incident has harmed the company's reputation, customer relations, and operations, leading to potential deferrals or cancellations of purchases/renewals and significant costs for investigations, remediation, and legal proceedings[104][105][106] - The company is subject to numerous lawsuits and governmental investigations, with uncertain outcomes that could result in substantial costs, penalties, and require changes to business operations, potentially increasing insurance costs[106][107] Risks Related to Our Business and Industry Business risks include fluctuating results, customer acquisition challenges, international operations, intense competition, acquisition integration, and talent retention - Quarterly revenue and operating results are difficult to predict and may fluctuate due to factors like sales lead generation, customer acquisition/retention, renewal rates, and the impact of the Cyber Incident and COVID-19[109][113][117][120][122] - International operations expose the company to risks such as currency fluctuations, regulatory complexities, intellectual property protection issues, political instability (e.g., Belarus, Brexit), and data privacy regulations (e.g., Schrems II)[125][126][127][128][129] - The company operates in highly competitive markets, faces risks from acquisitions (integration, liabilities, charges to earnings), depends on recruiting and retaining key employees, and must continuously innovate its product portfolio to meet evolving customer needs[131][139][142][146][149] Risks Related to the Potential Spin-Off The MSP spin-off is complex, costly, and may not achieve benefits, risking operational disruption and significant tax liabilities if not tax-free - The potential spin-off of the MSP business involves significant time, expense, and management attention, which could disrupt ongoing operations and adversely affect financial performance[162] - There is no assurance that the spin-off will be completed as planned or achieve its anticipated strategic, financial, or operational benefits, potentially leaving both companies smaller and less diversified[163][164] - If the spin-off does not qualify as a generally tax-free transaction for U.S. federal income tax purposes, SolarWinds, its stockholders, or the MSP business could incur significant tax liabilities[165][167] Risks Related to Government Regulation Global regulations on data privacy, export controls, and anti-corruption pose compliance risks, potentially leading to fines and reputational damage - The company is subject to various global data privacy and security regulations, including GDPR and the implications of the Schrems II case, which could result in increased costs and liabilities[168][169] - Compliance with governmental export controls, economic sanctions, and anti-corruption laws (e.g., FCPA, U.K. Bribery Act) is critical, as violations could lead to substantial fines, penalties, and reputational harm[171][172] - Evolving government regulation of the Internet and e-commerce, including potential new taxes or restrictions, could negatively affect the company's operating results[173] Risks Related to Our Intellectual Property Protecting and enforcing IP is challenging and costly, with open-source software use introducing additional risks of license violations and vulnerabilities - Protecting and enforcing intellectual property rights (patents, copyrights, trademarks, trade secrets) is crucial but entails significant expenses and risks of challenges, invalidation, or circumvention[174][175][176] - The software and technology industries are prone to frequent IP litigation, and claims of infringement could be costly, divert management resources, and potentially require the company to pay damages or cease offering certain products[181][183][184] - The use of open-source and third-party software in products carries risks, including unanticipated license conditions, potential litigation, security vulnerabilities, and difficulties in replacement, which could negatively affect business and operating results[186][187] Risks Related to Our Indebtedness Substantial $1.9 billion indebtedness creates financial risk, limiting cash flow and flexibility, with exposure to variable interest rates and foreign exchange - As of December 31, 2020, SolarWinds had substantial indebtedness of $1.9 billion, which could adversely affect financial health by dedicating cash flow to debt payments and increasing vulnerability to adverse economic conditions[189][190] - Credit agreements contain restrictive covenants limiting the company's ability to incur additional debt, engage in mergers, pay dividends, or make investments, potentially hindering business strategy[191][195] - Borrowings are subject to variable interest rates, exposing the company to interest rate risk, with uncertainties surrounding the transition from LIBOR after 2021, and foreign currency denominated debt introduces foreign exchange risk[197][198] Risks Related to Accounting and Taxation Risks include interest rate fluctuations, internal control failures, and adverse impacts from changes in tax laws or accounting standards - Borrowings under credit facilities are subject to variable interest rates, exposing the company to interest rate risk, with the LIBOR transition after 2021 posing uncertainty[198] - Failure to maintain proper and effective internal controls over financial reporting could materially adversely affect business, operating results, and stock price, potentially leading to restatements or loss of investor confidence[201][202][203] - Changes in tax laws (e.g., U.S. Tax Act, proposed Biden tax changes) or interpretations, and potential challenges from tax authorities, could negatively impact the company's effective tax rate, cash tax liability, and financial performance[205][206][207][209][210] Risks Related to Ownership of Our Common Stock Common stock price is volatile due to the Cyber Incident and market factors, with compliance costs and potential dilution from stock sales - The trading price of common stock could be volatile due to factors such as the Cyber Incident, product announcements, changes in customer perception, key personnel departures, and overall market conditions[211] - Being a public company imposes significant compliance requirements (Exchange Act, Sarbanes-Oxley, NYSE rules) that strain resources, increase costs, and can distract management[213][214] - Sales of substantial amounts of common stock, including by Sponsors, or future issuances of capital stock for financings, acquisitions, or incentive plans, could dilute existing stockholders and reduce the market price[216][218][219] - The company does not intend to pay dividends on its common stock, except potentially if the MSP business spin-off proceeds[220] Risks Related to Our Organizational Structure Anti-takeover provisions and significant Sponsor influence, including potential conflicts of interest, characterize the organizational structure - The company's restated charter and bylaws contain anti-takeover provisions, such as a classified board, restrictions on director removal, and limitations on stockholder actions, which could delay or discourage takeover attempts[221][222][223] - The Sponsors beneficially owned 78.3% of common stock as of December 31, 2020, giving them controlling influence over matters requiring stockholder approval and the right to designate a majority of the board of directors[224] - Directors affiliated with the Lead Sponsors may face conflicts of interest, and the Sponsors may pursue corporate opportunities independent of SolarWinds. The company's "controlled company" status allows exemptions from certain NYSE corporate governance requirements[226][227][231] Item 1B. Unresolved Staff Comments There are no unresolved staff comments from the SEC regarding previous company filings - There are no unresolved staff comments[232] Item 2. Properties SolarWinds leases all its office spaces, including its 348,000 square feet Austin headquarters, deeming current facilities adequate - SolarWinds leases all its offices and does not own any real estate[233] - The corporate headquarters is in Austin, Texas, consisting of approximately 348,000 square feet[233] - The company also leases office space internationally in locations such as Cork (Ireland), Manila (Philippines), Brno (Czech Republic), and Singapore[233] Item 3. Legal Proceedings Legal proceedings related to the Cyber Incident are detailed elsewhere; no other material proceedings are pending - Legal proceedings and government investigations related to the Cyber Incident are described in Item 7 and Note 16[235] - Other than the Cyber Incident, there are no material legal proceedings against the company or its subsidiaries[236] - The outcome of any legal proceedings is subject to significant uncertainty, and adverse resolutions could materially affect consolidated financial statements[236] Item 4. Mine Safety Disclosures This item is not applicable to SolarWinds Corporation - This item is not applicable[237] PART II This part covers common equity market information, management's financial analysis, market risks, financial statements, and internal controls Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities SolarWinds common stock (SWI) is listed on NYSE; no cash dividends paid, but 64,700 employee-held restricted shares were repurchased in Q4 2020 - SolarWinds common stock (SWI) has been listed on the NYSE since its IPO on October 19, 2018, priced at $15.00 per share[240] - The company has never declared or paid cash dividends on its common stock and intends to retain future earnings for business operations, with potential dividends only if the MSP business spin-off proceeds[242] Issuer Purchases of Securities (Q4 2020) | Period | Number of Shares Purchased | | :-------------------- | :------------------------- | | October 1-31, 2020 | — | | November 1-30, 2020 | 57,700 | | December 1-31, 2020 | 7,000 | | Total | 64,700 | - All repurchases in Q4 2020 related to employee-held restricted stock subject to vesting, not a publicly announced program[248] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial condition and operations, detailing Cyber Incident impacts, MSP spin-off, revenue, profitability, and cash flow Key Financial Highlights (Year Ended December 31, 2020 vs. 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :--------- | | Total Revenue | $1,019.2 | $932.5 | 9.3% | | Recurring Revenue (% of Total) | 85.8% | 82.3% | +3.5 pp | | Core IT Management Revenue | $716.8 | $669.1 | 7.1% | | MSP Product Revenue | $302.5 | $263.4 | 14.8% | | Subscription ARR | $435.1 | $371.6 | 17.1% | | Total ARR | $959.7 | $845.1 | 13.6% | | Net Income | $158.5 | $18.6 | 752.2% | | Adjusted EBITDA | $489.7 | $453.6 | 8.0% | | Cash Flows from Operations | $389.1 | $299.9 | 29.7% | - The Cyber Incident incurred $3.5 million in pretax expenses in 2020 and is expected to negatively impact future revenue, profitability, and cash flows due to ongoing investigations, legal proceedings, and increased security investments[258][260][279] - The potential spin-off of the MSP business incurred $12.2 million in exploration costs in 2020 and is targeted for Q2 2021, aiming to create two separately traded public companies[263][266] Overview SolarWinds provides IT infrastructure management software, continuously innovating its broad product portfolio for hybrid IT environments - SolarWinds provides IT infrastructure management software, enabling organizations to monitor and manage performance across on-premises, cloud, and hybrid IT environments[250] - The company offers a broad portfolio of infrastructure-location-agnostic products for network, systems, desktop, application, storage, database, website infrastructures, and IT service desks[251] - SolarWinds plans to continue innovating and investing in product development to enhance functionality, ease of use, and integration of its products[251] Cyber Incident The December 2020 Orion cyberattack incurred $3.5 million in 2020 expenses, with ongoing investigations, lawsuits, and future costs expected - A cyberattack on the Orion Software Platform involved malicious code (Sunburst) injected into builds released between March and June 2020, potentially compromising customer servers[252][253] - The company incurred $3.5 million in pretax expenses related to the Cyber Incident in 2020, primarily for investigation, remediation, legal, and professional services[258] - SolarWinds is subject to numerous lawsuits and government investigations, with significant future legal and professional services costs expected, and maintains $15 million in cybersecurity insurance coverage[259][260][261] Impacts of COVID-19 COVID-19 shifted the workforce remotely, impacting license revenue and accounts receivable, with uncertain long-term financial effects - SolarWinds transitioned nearly all its workforce to a remote working environment in response to the COVID-19 pandemic[262] - The pandemic has led to a decline in license revenue and an increase in the loss provision for accounts receivable[262] - The long-term impact of COVID-19 on the business, results of operations, and financial condition remains uncertain due to numerous evolving factors[262] Potential Spin-Off of MSP Business SolarWinds is exploring a tax-free MSP business spin-off, targeted for Q2 2021, incurring $12.2 million in 2020 exploration costs - SolarWinds is exploring a potential spin-off of its MSP business into a newly created and separately traded public company, with a Form 10 registration statement confidentially submitted to the SEC[263] - The spin-off, if completed, would be structured as a tax-free, pro-rata distribution to stockholders, allowing them to own shares in both companies, and is targeted for Q2 2021[265] - The company incurred $12.2 million in spin-off exploration costs during the year ended December 31, 2020, primarily for legal, accounting, and advisory fees[266] Financial Highlights In 2020, total revenue reached $1.02 billion, with 85.8% recurring revenue, $158.5 million net income, and $389.1 million operating cash flow Revenue and Profitability Highlights (Year Ended December 31, 2020 vs. 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change | | :-------------------------------- | :------------------ | :------------------ | :------ | | Total Revenue | $1,019.2 | $932.5 | +9.3% | | Recurring Revenue (% of Total) | 85.8% | 82.3% | +3.5 pp | | Core IT Management Revenue | $716.8 | $669.1 | +7.1% | | MSP Product Revenue | $302.5 | $263.4 | +14.8% | | Subscription ARR | $435.1 | $371.6 | +17.1% | | Total ARR | $959.7 | $845.1 | +13.6% | | Net Income | $158.5 | $18.6 | +752.2% | | Adjusted EBITDA | $489.7 | $453.6 | +8.0% | | Cash Flows from Operations | $389.1 | $299.9 | +29.7% | - The increase in net income for 2020 includes a discrete tax benefit of $138.2 million related to an intra-group transfer of intellectual property rights[277] - The company had over 320,000 customers as of December 31, 2020, with 1,057 customers spending more than $100,000, up from 897 in 2019[272][273] Acquisitions In October 2020, SolarWinds acquired SentryOne for $145.1 million, enhancing database performance monitoring solutions - In October 2020, SolarWinds acquired SentryOne, a provider of database performance monitoring and DataOps solutions, for approximately $145.1 million[280] - The acquisition was funded with cash on hand and complements existing database management offerings, strengthening support for Microsoft and Microsoft Azure environments[280] Components of Our Results of Operations Revenue includes recurring and license components, operating expenses are significant, and a $138.2 million tax benefit arose from an IP transfer - Revenue consists of recurring revenue (subscription and maintenance) and perpetual license revenue, with subscription options for on-premises products launched in April 2020[283][284][285] - Operating expenses include sales and marketing, research and development, general and administrative, and amortization of acquired intangibles, with personnel costs being the most significant component[285][287] - A discrete tax benefit of $138.2 million was recognized in 2020 due to an intra-group transfer of intellectual property rights to the Irish subsidiary, impacting the effective tax rate[291] Comparison of the Years Ended December 31, 2020 and 2019 Total revenue grew 9.3% to $1.02 billion in 2020, driven by recurring revenue, while operating expenses increased, and a $128.2 million tax benefit was recorded Revenue Comparison (2020 vs. 2019) | Revenue Type | 2020 (in thousands) | 2019 (in thousands) | Change (Amount) | Change (%) | | :-------------------- | :------------------ | :------------------ | :-------------- | :--------- | | Subscription | $396,496 | $320,747 | $75,749 | 23.6% | | Maintenance | $478,284 | $446,450 | $31,834 | 7.1% | | Total Recurring Revenue | $874,780 | $767,197 | $107,583 | 14.0% | | License | $144,461 | $165,328 | $(20,867) | (12.6)% | | Total Revenue | $1,019,241 | $932,525 | $86,716 | 9.3% | Operating Expenses Comparison (2020 vs. 2019) | Expense Type | 2020 (in thousands) | 2019 (in thousands) | Change (Amount) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :-------------- | :--------- | | Sales and marketing | $298,452 | $264,199 | $34,253 | 13.0% | | Research and development | $126,216 | $110,362 | $15,854 | 14.4% | | General and administrative | $137,541 | $97,525 | $40,016 | 41.0% | | Amortization of acquired intangibles | $74,973 | $69,812 | $5,161 | 7.4% | | Total Operating Expenses | $637,182 | $541,898 | $95,284 | 17.6% | - Net interest expense decreased by $32.2 million (29.8%) due to lower interest rates (weighted-average 3.4% in 2020 vs. 5.0% in 2019)[304] - Income tax benefit was $128.2 million in 2020, a significant change from an $8.9 million expense in 2019, primarily due to a $138.2 million discrete tax benefit from an intra-group IP transfer[306] Comparison of the Years Ended December 31, 2019 and 2018 For 2019 and 2018 operational comparisons, refer to the company's 2019 annual report on Form 10-K - For a comparison of results of operations for the years ended December 31, 2019 and 2018, refer to Part II, Item 7 of the annual report on Form 10-K for the year ended December 31, 2019[307] Non-GAAP Financial Measures Non-GAAP measures like Adjusted EBITDA provide insights into core operating performance by excluding non-recurring and non-cash items - Non-GAAP financial measures are used to clarify and enhance understanding of performance, excluding impacts not considered part of core operating results[308] - Adjustments include purchase accounting, amortization of acquired intangibles, stock-based compensation, acquisition and other costs, spin-off exploration costs, restructuring costs, and Cyber Incident costs[312][313][314][315] Non-GAAP Financial Measures (2020 vs. 2019) | Metric | 2020 (in thousands) | 2019 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Non-GAAP Total Revenue | $1,021,781 | $938,455 | | Non-GAAP Operating Income | $466,425 | $436,210 | | Non-GAAP Operating Margin | 45.6% | 46.5% | | Adjusted EBITDA | $489,716 | $453,633 | | Adjusted EBITDA Margin | 47.9% | 48.3% | Liquidity and Capital Resources SolarWinds held $370.5 million in cash and $1.9 billion in debt as of December 31, 2020, with sufficient liquidity for the next 12 months Cash and Indebtedness (as of December 31, 2020) | Metric | Amount (in millions) | | :-------------------------------- | :------------------- | | Cash and Cash Equivalents | $370.5 | | International Cash Holdings | $163.4 | | Total Indebtedness | $1,902.6 | | Available Revolving Credit Facility | $125.0 | - The company believes existing cash, operating cash flows, and borrowing capacity are sufficient to fund operations and debt repayments for at least the next 12 months, despite potential impacts from the Cyber Incident and COVID-19[321] Cash Flow Summary (Year Ended December 31, 2020 vs. 2019) | Cash Flow Type | 2020 (in thousands) | 2019 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Net cash provided by operating activities | $389,094 | $299,907 | | Net cash used in investing activities | $(180,127) | $(482,453) | | Net cash used in financing activities | $(25,556) | $(25,624) | - Operating cash flow increased due to higher net income adjusted for non-cash items, including a deferred tax asset from the IP Transfer. Investing cash flow decreased due to fewer acquisitions[329][330] Critical Accounting Policies and Estimates Financial statements rely on critical estimates for goodwill, revenue recognition, income taxes, and loss contingencies, sensitive to changing assumptions - Critical accounting policies involve significant judgment and estimates for goodwill, intangibles, long-lived assets, contingent consideration, revenue recognition, stock-based compensation, income taxes, and loss contingencies[337] - A quantitative goodwill impairment assessment was performed as of December 31, 2020, due to the Cyber Incident, using income and market approaches. Core IT and ITSM reporting units' fair values exceeded carrying values by approximately 15.6% and 17.4%, respectively, with no impairment recognized[343][344] - The intra-group IP transfer to Ireland resulted in a $138.2 million deferred tax asset and related tax benefit, requiring significant judgment in fair value determination and evaluation of associated tax laws[356] - Revenue recognition involves a five-step process, with significant judgment in identifying performance obligations and allocating transaction prices based on estimated standalone selling prices[347][348][349] Off-Balance Sheet Arrangements SolarWinds had no material off-balance sheet arrangements as of December 31, 2020 - As of December 31, 2020, SolarWinds had no relationships with unconsolidated organizations or financial partnerships for off-balance sheet arrangements[359] Recent Accounting Pronouncements Refer to Note 2, "Summary of Significant Accounting Policies," for recent accounting pronouncements - A full description of recent accounting pronouncements is incorporated by reference from Note 2, "Summary of Significant Accounting Policies"[360] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risks include interest rate fluctuations on $1.9 billion variable-rate debt and foreign currency exchange rate movements - SolarWinds has $1.9 billion in total indebtedness with variable interest rates, exposing it to interest rate risk[363] Interest Rate Sensitivity (as of December 31, 2020) | Scenario | Impact on Annual Interest Expense | | :-------------------------------- | :-------------------------------- | | Hypothetical 100 bps increase | ~$19.3 million | | Weighted-average rate on borrowings | 2.90% | | Total Indebtedness | $1.9 billion | - The company faces foreign currency exchange risk from international operations, primarily in Euro, British Pound Sterling, and Australian Dollar, impacting reported revenue, expenses, and balance sheet accounts[366][367] - Foreign currency transaction risk is managed using purchased foreign currency forward contracts, but translation risk from converting foreign subsidiary financial statements into USD remains[369][370][372] Item 8. Financial Statements and Supplementary Data Consolidated financial statements, including balance sheets, statements of operations, and cash flows, are incorporated by reference - The consolidated financial statements, including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity (deficit), and cash flows, are incorporated by reference[374] - Schedule II—Valuation and Qualifying Accounts is also included as a financial statement schedule[397] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure occurred during the period - There were no changes in or disagreements with the accountants on accounting and financial disclosure matters[375] Item 9A. Controls and Procedures Disclosure controls and internal control over financial reporting were effective as of December 31, 2020, excluding a recent acquisition - Management, with the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2020[376][378] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[380] - SQL Sentry Holdings, LLC, acquired during 2020, was excluded from management's assessment of internal control over financial reporting[381][382] - There were no material changes in internal control over financial reporting during the quarter ended December 31, 2020[384] Item 9B. Other Information No other information is required to be disclosed under Item 9B - No other information is required under Item 9B[385] PART III This part incorporates information on directors, executive compensation, security ownership, related transactions, and principal accountant fees Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement[389] - The company's Code of Business Ethics and Conduct is available on its investor relations website[390] Item 11. Executive Compensation Executive compensation information is incorporated by reference from the 2021 Proxy Statement - Information on executive compensation is incorporated by reference from the Proxy Statement[391] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the 2021 Proxy Statement - Information on security ownership of certain beneficial owners and management is incorporated by reference from the Proxy Statement[392] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2021 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement[393] Item 14. Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the 2021 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the Proxy Statement[394] PART IV This part includes exhibits, financial statement schedules, and the required signatures for the report Item 15. Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and a comprehensive exhibit index, including various agreements and certifications - The report includes consolidated financial statements and Schedule II—Valuation and Qualifying Accounts[397] - The Exhibit Index lists various documents incorporated by reference, such as the Share Purchase Agreement, Credit Agreements, Stockholders' Agreement, Equity Plans, and Employment Agreements[399][401][403][405] - Certifications from the Chief Executive Officer and Chief Financial Officer, along with XBRL Instance Document and Taxonomy Extension files, are also included as exhibits[405] Item 16. Form 10-K Summary No Form 10-K Summary is provided in this section - No Form 10-K Summary is provided[406] Signatures This section contains the signatures of SolarWinds Corporation's authorized officers and Board of Directors - The report is signed by the President and Chief Executive Officer (Sudhakar Ramakrishna) and Chief Financial Officer (J. Barton Kalsu) as principal executive and financial/accounting officers, respectively[411][412] - Members of the Board of Directors also signed the report[412]