Form 10-Q SolarWinds Corp For: Jun 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-38711
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(512 ) 682.9300
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☑ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes þ No
On August 2, 2022, 160,914,540 shares of common stock, par value $0.001 per share, were outstanding.
SOLARWINDS CORPORATION
Table of Contents
| PART I - FINANCIAL INFORMATION | |||||||||||
| Page | |||||||||||
| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| PART II - OTHER INFORMATION | |||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 6. | |||||||||||
| Certifications | |||||||||||
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Safe Harbor Cautionary Statement
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such statements may be signified by terms such as “aim,” “anticipate,” “believe,” “continue,” “expect,” “feel,” “intend,” “estimate,” “seek,” “plan,” “may,” “can,” “could,” “should,” “will,” “would” or similar expressions and the negatives of those terms. In this report, forward-looking statements include statements regarding our financial projections, future financial performance and plans and objectives for future operations including, without limitation, the following:
•expectations regarding our financial condition and results of operations, including revenue, revenue growth, revenue mix, cost of revenue, operating expenses, operating income, non-GAAP operating income, non-GAAP operating margin, adjusted EBITDA and adjusted EBITDA margin, cash flows and effective income tax rate;
•findings from our investigations into the cyberattack on our Orion Software Platform and internal systems (the "Cyber Incident"), including our understanding of the nature, source and duration of the attack and our plans to ensure our products and internal systems are secure and provide additional information regarding our findings, as well as our expectations regarding the impact of the Cyber Incident on our business and reputation, the success of our related mitigation and remediation efforts and the additional costs, liabilities and other adverse consequences that we may incur as a result of the Cyber Incident;
•expectations regarding the impact the government investigations and litigation resulting from the Cyber Incident may have on our business;
•expectations regarding the impact and benefits of the spin-off of the N-able business into a newly created and separately traded public company;
•expectations regarding investment in product development and our expectations about the results of those efforts;
•expectations regarding hiring additional personnel globally in the areas of sales and marketing and research and development;
•expectations regarding our evolution from monitoring to observability;
•intentions regarding our international earnings and investment of those earnings in international operations;
•expectations regarding our capital expenditures;
•expectations concerning acquisitions and opportunities resulting from our acquisitions;
•expectations regarding the impact of the COVID-19 pandemic on our business, results of operations and financial condition; and
•our beliefs regarding the sufficiency of our cash and cash equivalents, cash flows from operating activities and borrowing capacity.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially and adversely different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the following:
•numerous risks related to the Cyber Incident, including with respect to (1) the discovery of new or different information regarding the Cyber Incident, including with respect to its scope, the threat actor’s access to SolarWinds’ environments and its related activities during such period, and the related impact on SolarWinds’ systems, products, current or former employees and customers, (2) the possibility that our mitigation and remediation efforts with respect to the Cyber Incident may not be successful, (3) the possibility that additional confidential, proprietary, or personal information, including information of SolarWinds’ current or former employees and customers, was accessed and exfiltrated as a result of the Cyber Incident, (4) numerous financial, legal, reputational and other risks to us related to the Cyber Incident, including risks that the incident or SolarWinds’ response thereto, including with respect to providing notices to any impacted individuals, may result in the loss, compromise or corruption of data and proprietary information, loss of business as a result of termination or non-renewal of agreements or reduced purchases or upgrades of our products, reputational damage adversely affecting customer, partner and vendor relationships and investor confidence, increased attrition of personnel and distraction of key and other personnel, U.S. or foreign regulatory investigations and enforcement actions, litigation, indemnity obligations, damages for contractual breach, penalties for violation of applicable laws or regulations, significant costs for remediation and the incurrence of other liabilities, (5) risks that our insurance coverage, including coverage relating to certain security and privacy damages and claim expenses, may not be available or sufficient to compensate for all liabilities we incur related to these matters, (6) the possibility that our steps to secure our internal environment, improve our product development environment and ensure the security and integrity of the software that we deliver to our customers may not be successful or sufficient to protect against future threat actors or attacks or be
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perceived by existing and prospective customers as sufficient to address the harm caused by Cyber Incident and (7) the risk that the impact of the Cyber Incident may be proportionally greater in future periods as a result of the spin-off of the N-able business;
•other risks related to cyber security, including that we may experience other security incidents or have vulnerabilities in our systems and services exploited, which may result in compromises or breaches of our and our customers’ systems or, theft or misappropriation of our and our customers’ confidential, proprietary or personal information, as well as exposure to legal and other liabilities, including the related risk of higher customer, employee and partner attrition and the loss of key personnel, as well as negative impacts to our sales, renewals and upgrades;
•risks related to the spin-off of the N-able business into a newly created and separately traded public company, including that we may not realize some or all of the anticipated strategic, financial, operational, marketing or other benefits from the separation, or such benefits may be delayed by a variety of circumstances, which may not be under our control, we may experience increased difficulties in attracting, retaining and motivating employees or maintaining or initiating relationships with partners, customers and other parties with which we currently do business, or may do business in the future, we could incur significant liability if the separation is determined to be a taxable transaction, potential indemnification liabilities incurred in connection with the separation could materially affect our business and financial results and N-able may fail to perform under various transaction agreements that were executed as part of the separation;
•risks related to the evolving breadth of our sales motion and challenges, investments and additional costs associated with increased selling efforts toward enterprise customers and adopting a subscription first approach;
•risks relating to increased investments in, and the timing of, our transformation from monitoring to observability;
•potential foreign exchange gains and losses related to expenses and sales denominated in currencies other than the functional currency of an associated entity;
•the possibility that the ongoing global COVID-19 pandemic may adversely affect our business, results of operations and financial condition;
•any of the following factors either generally or as a result of the impacts of the Cyber Incident, the global COVID-19 pandemic, the war in Ukraine or inflation on the global economy or on our business operations and financial condition or on the business operations and financial conditions of our customers, their end-customers and our prospective customers;
◦reductions in information technology spending or delays in purchasing decisions by our customers, their end-customers and our prospective customers;
◦the inability to sell products to new customers or to sell additional products or upgrades to our existing customers;
◦any decline in our renewal or net retention rates;
◦the inability to generate significant volumes of high-quality sales leads from our digital marketing initiatives and convert such leads into new business at acceptable conversion rates;
◦the timing and adoption of new products, product upgrades or pricing model changes by us or our competitors;
◦changes in interest rates;
◦risks associated with our international operations; and
◦ongoing sanctions and disruptions resulting from the war in Ukraine;
•the possibility that our operating income could fluctuate and may decline as percentage of revenue as we make further expenditures to expand our operations in order to support additional growth in our business;
•risks associated with the estimates and assumptions used in our impairment testing;
•our ability to compete effectively in the markets we serve;
•our ability to attract, retain and motivate employees;
•our inability to successfully identify, complete and integrate acquisitions and manage our growth effectively;
•risks associated with our status as a controlled company; and
•such other risks and uncertainties described more fully in documents filed with or furnished to the Securities and Exchange Commission, including the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially and adversely from those anticipated in these forward-looking statements, even if new information becomes available in the future.
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Investors and others should note that we announce material information to our investors using our investor relations website (https://investors.solarwinds.com), SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media to communicate with the public about our company, our business and other matters. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the social media channels listed on our investor relations website.
In this report “SolarWinds,” “Company,” “we,” “us” and “our” refer to SolarWinds Corporation and its consolidated subsidiaries. On July 19, 2021, we completed the previously announced separation and distribution of our managed service provider (“N-able”) business into a newly created and separately traded public company, N-able, Inc. Unless otherwise indicated, all references to the Company exclude the N-able business for all periods presented.
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
SolarWinds Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share and per share information)
(Unaudited)
| June 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
Accounts receivable, net of allowances of $ | |||||||||||
| Income tax receivable | |||||||||||
| Prepaid and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease assets | |||||||||||
| Deferred taxes | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets, net | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities and other | |||||||||||
| Current operating lease liabilities | |||||||||||
| Accrued interest payable | |||||||||||
| Income taxes payable | |||||||||||
| Current portion of deferred revenue | |||||||||||
| Current debt obligation | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities: | |||||||||||
| Deferred revenue, net of current portion | |||||||||||
| Non-current deferred taxes | |||||||||||
| Non-current operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Long-term debt, net of current portion | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (Note 10) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $ | |||||||||||
Preferred stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income (loss) | ( | ||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
SolarWinds Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share information)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Subscription | $ | $ | $ | $ | |||||||||||||||||||
| Maintenance | |||||||||||||||||||||||
| Total recurring revenue | |||||||||||||||||||||||
| License | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Cost of recurring revenue | |||||||||||||||||||||||
| Amortization of acquired technologies | |||||||||||||||||||||||
| Total cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Amortization of acquired intangibles | |||||||||||||||||||||||
| Goodwill impairment | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating loss | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense), net | ( | ||||||||||||||||||||||
| Total other expense | ( | ( | ( | ( | |||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax expense (benefit) | ( | ( | |||||||||||||||||||||
| Net loss from continuing operations | ( | ( | $ | ( | $ | ( | |||||||||||||||||
| Net income from discontinued operations, net of tax | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss from continuing operations available to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net income from discontinued operations available to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Net income (loss) available to common stockholders per share: | |||||||||||||||||||||||
| Basic loss from continuing operations per share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Basic earnings from discontinued operations per share | $ | $ | |||||||||||||||||||||
| Basic loss per share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted loss from continuing operations per share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted earnings from discontinued operations per share | $ | $ | |||||||||||||||||||||
| Diluted loss per share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted-average shares used to compute net income (loss) available to common stockholders per share: | |||||||||||||||||||||||
| Shares used in computation of basic earnings (loss) per share | |||||||||||||||||||||||
| Shares used in computation of diluted earnings (loss) per share | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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SolarWinds Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustment | ( | ( | ( | ||||||||||||||||||||
Unrealized losses on investments, net of income tax expense (benefit) of $( | ( | ( | |||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||
| Comprehensive income (loss) | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
SolarWinds Corporation
Condensed Consolidated Statements of Stockholders' Equity
(In thousands)
(Unaudited)
| Three Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Unrealized gain (loss) on investments, net of taxes | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Comprehensive loss | ( | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Restricted stock units issued, net of shares withheld for taxes | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Issuance of stock | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ( | $ | ||||||||||||||||||||||||||||||||
Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Unrealized gain (loss) on investments, net of taxes | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Comprehensive loss | ( | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Restricted stock units issued, net of shares withheld for taxes | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Issuance of stock | — | — | |||||||||||||||||||||||||||||||||
| Issuance of stock under employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Restricted stock units issued, net of shares withheld for taxes | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Issuance of stock | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
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| Six months ended June 30, 2021 | |||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Comprehensive loss | ( | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Restricted stock units issued, net of shares withheld for taxes | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Issuance of stock | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of stock under employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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SolarWinds Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss from continuing operations | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Goodwill and indefinite-lived intangible asset impairment | |||||||||||
| Provision for losses on accounts receivable | |||||||||||
| Stock-based compensation expense | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Deferred taxes | ( | ( | |||||||||
| Gain on foreign currency exchange rates | ( | ( | |||||||||
| Other non-cash expenses | |||||||||||
| Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations: | |||||||||||
| Accounts receivable | |||||||||||
| Income taxes receivable | ( | ( | |||||||||
| Prepaid and other assets | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Accrued liabilities and other | ( | ( | |||||||||
| Accrued interest payable | ( | ||||||||||
| Income taxes payable | ( | ( | |||||||||
| Deferred revenue | ( | ( | |||||||||
| Other long-term liabilities | ( | ||||||||||
| Net cash provided by operating activities from continuing operations | |||||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of investments | ( | ||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Purchases of intangible assets | ( | ( | |||||||||
| Acquisitions, net of cash acquired | ( | ||||||||||
| Net cash used in investing activities from continuing operations | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from issuance of common stock under employee stock purchase plan | |||||||||||
| Repurchase of common stock and incentive restricted stock | ( | ( | |||||||||
| Exercise of stock options | |||||||||||
| Repayments of borrowings from credit agreement | ( | ( | |||||||||
| Net cash used in financing activities from continuing operations | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents from continuing operations | ( | ( | |||||||||
| Cash flows of discontinued operations | |||||||||||
| Operating activities of discontinued operations | |||||||||||
| Investing activities of discontinued operations | ( | ||||||||||
| Financing activities of discontinued operations | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents from discontinued operations | ( | ||||||||||
| Net cash provided by discontinued activities | |||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents | |||||||||||
| Beginning of period | |||||||||||
| End of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Organization and Nature of Operations
SolarWinds Corporation, a Delaware corporation, and its subsidiaries (“Company”, “we,” “us” and “our”) is a leading provider of simple, powerful and secure information technology, or IT, management software. Our solutions give organizations worldwide, regardless of type, size or complexity, the power to accelerate business transformation in today's hybrid IT environments. Our approach, which we refer to as the SolarWinds Model, combines customer-driven products with an "inside-first" selling motion. We’ve built our business to enable the technology professionals who use our products to manage “all things IT.” Our range of customers has expanded over time to include network and systems engineers, database administrators, storage administrators, DevOps, SecOps and service desk professionals. Our SolarWinds Model enables us to sell our products for use in organizations ranging in size from very small businesses to large enterprises.
Spin-Off of N-able Business
On July 19, 2021, we completed the separation and distribution of our managed service provider (“N-able”) business into a newly created and separately traded public company, N-able, Inc. We refer to this transaction as the “Separation.”
2. Summary of Significant Accounting Policies
Reverse Stock Split
Effective July 30, 2021, we effected a 2:1 reverse stock split of our common stock. As a result of the reverse stock split, all share and per share figures contained in the condensed consolidated financial statements have been retroactively restated as if the reverse stock split occurred at the beginning of the periods presented.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts and the disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The actual results that we experience may differ materially from our estimates. The accounting estimates that require our most significant, difficult and subjective judgments include:
•the valuation of goodwill, intangibles, long-lived assets and contingent consideration;
•revenue recognition;
•stock-based compensation;
•income taxes; and
Recently Adopted Accounting Pronouncements
12
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Impairment of Goodwill, Intangible Assets and Long-lived Assets
Goodwill
Our goodwill was derived from the take private transaction in early 2016 ("Take Private") and acquisitions where the purchase price exceeded the fair value of the net identifiable assets acquired. Goodwill is tested for impairment at least annually on October 1st or more frequently if events or circumstances indicate it is more likely than not that the fair value of our reporting unit is less than its carrying value.
Subsequent to our annual 2021 goodwill impairment analysis on October 1, 2021, we experienced a decline in our stock price resulting in the total market value of our shares of stock outstanding (our "market capitalization"), being less than the carrying value of our reporting unit. Therefore, as of December 31, 2021, we assessed several events and circumstances that could affect the significant inputs used to determine the fair value of our one reporting unit, including the significance of the amount of excess fair value over carrying value, consistency of operating margins and cash flows, budgeted-to-actual performance from prior year, overall change in economic climate, changes in the industry and competitive environment, and earnings quality and sustainability. We considered the decline in the market capitalization being less than the carrying value of our reporting unit in our evaluation of goodwill impairment indicators and determined it appropriate to perform a quantitative assessment of our reporting unit as of December 31, 2021. As a result of the impairment analysis, our reporting unit was determined to have a fair value that exceeded its carrying value by approximately 7.2 %, and therefore no impairment was recognized.
As of March 31, 2022, while we experienced a further decline in our market capitalization, there were no unanticipated changes or negative indicators in the goodwill impairment qualitative factors or significant changes to assumptions used in the discounted cash flow models that would impact the fair value of our reporting unit. After considering all available evidence, we determined there were no indicators of impairment or changes to circumstances that more likely than not reduced the fair value of our reporting unit to less than its carrying value as of March 31, 2022.
As of June 30, 2022, we experienced a further decline in our market capitalization and considered the impact of current macroeconomic conditions on our projected operating results and assumptions used in the income approach - discounted cash flow method and market approach models that impact the fair value of our reporting unit. The macroeconomic conditions considered include deterioration in the equity markets evidenced by sustained declines in our stock price, those of our peers, and major market indices since December 31, 2021, which reduced the market multiples, along with an increase in the weighted-average cost of capital primarily driven by an increase in interest rates. In addition, as of June 30, 2022, we lowered our projected operating results primarily due to the recent impact of foreign currency exchange rate fluctuations on our projected sales and market concerns related to inflation, supply chain disruption issues and other macroeconomic factors. After considering all available evidence in our evaluation of goodwill impairment indicators, we determined it appropriate to perform an interim quantitative assessment of our reporting unit as of June 30, 2022. We engaged a third-party valuation specialist to assist in the performance of the impairment analysis of our reporting unit.
For the interim quantitative goodwill impairment analysis performed as of June 30, 2022, we utilized a combination of both an income and market approach to determine the fair value of our reporting unit. The income approach utilizes a discounted cash flow method which is based on the present value of projected cash flows. The discounted cash flow models reflect our assumptions regarding revenue growth rates, risk-adjusted discount rate, terminal period growth rate, economic and market trends and other expectations about the anticipated operating results of our reporting unit. Under the market approach, we estimate the fair value based on market multiples of revenues derived from comparable publicly traded companies with operating characteristics similar to the reporting unit. As a result of the interim goodwill impairment analysis, our reporting unit was determined to have a carrying value that exceeded its fair value and therefore, a $612.4 million non-cash goodwill impairment charge was recognized in our condensed consolidated statements of operations for the three months ended June 30, 2022.
Fair value determination of our reporting unit requires considerable judgment and is sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the quantitative goodwill impairment tests will prove to be an accurate prediction of future results. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting unit may include such items as: (i) volatility in the equity and debt markets or other macroeconomic factors, (ii) an increase in the weighted-average cost of capital due to further increases in interest rates, (iii)
13
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
timing and success of new products introduced in our evolution from monitoring to observability, (iv) the ongoing impact of the Cyber Incident including a decrease in future cash flows due to lower than expected license sales or maintenance renewals, higher than expected customer attrition, higher than estimated costs to respond and adverse loss exposure from claims, fines or penalties resulting from government investigations and litigation; and (v) fluctuations in foreign currency exchange rates that may negatively impact our reported results of operations. Accordingly, if our current cash flow assumptions are not realized, we experience further sustained declines in our stock price or market capitalization, or there are further declines in the market multiplies used in our analysis, it is possible that an additional impairment charge may be recorded in the future, which could be material.
Indefinite-lived Intangible Assets
We review our indefinite-lived intangible assets for impairment annually, in the fourth quarter, or more frequently if a triggering event occurs. We first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative test. If necessary, the quantitative test is performed by comparing the fair value of indefinite lived intangible assets to the carrying value. In the event the carrying value exceeds the fair value of the assets, the assets are written down to their fair value. As of June 30, 2022, due to the factors discussed in the goodwill analysis above, we performed a quantitative assessment of our indefinite-lived intangible assets utilizing a relief from royalty method and determined the estimated fair value of the SolarWinds trade name, recorded in connection with the Take Private, was less than its carrying value. As a result, we recorded a $9.4 million non-cash impairment charge which is included in general and administrative expense in our condensed consolidated statements of operations for the three months ended June 30, 2022.
Long-lived Assets
Investments
Our investments, classified as available-for-sale securities, consist of marketable securities such as U.S. Treasury securities, corporate bonds, commercial paper and asset-backed securities. We determine the appropriate classification of our investments at the time of purchase and reevaluate such determination at each balance sheet date. We may classify our available-for-sale securities as either short-term or long-term investments. We classify an investment as short-term if we have both the intent and ability to convert the security into cash to fund current operations.
Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss), which is a component of shareholders' equity except for any unrealized losses determined to be related to credit losses, which we record within other income (expense), net in our condensed consolidated statements of operations. Any premiums or discounts are amortized or accreted, respectively, to maturity as a component of interest expense, net in our condensed consolidated statements of operations. Cash flows from the amount of purchases, sales and maturities of available-for-sale securities are classified as cash flows from investing activities. Amortization and accretion of purchased premiums and discounts on securities are included as a non-cash adjustment to net income (loss) within cash flows from operating activities in our condensed consolidated statements of cash flows.
Fair Value Measurements
We apply the authoritative guidance on fair value measurements for financial assets and liabilities that are measured at fair value on a recurring basis and non-financial assets and liabilities, such as goodwill, intangible assets and property, plant and equipment that are measured at fair value on a non-recurring basis.
The guidance establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:
Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets accessible by us.
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SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Level 2: Inputs that are observable in the marketplace other than those inputs classified as Level 1.
Level 3: Inputs that are unobservable in the marketplace and significant to the valuation.
We determine the fair value of our available-for-sale securities based on inputs obtained from multiple pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, we classify all of our available-for-sale securities as being valued using Level 2 inputs. The valuation techniques used to determine the fair value of our financial instruments having Level 2 inputs are derived from unadjusted, non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models. Our procedures include controls to ensure that appropriate fair values are recorded by a review of the valuation methods and assumptions.
See Note 6. Fair Value Measurements for a summary of our financial instruments accounted for at fair value on a recurring basis. The carrying amounts reported in our consolidated balance sheets for cash, accounts receivable, accounts payable and other accrued expenses approximate fair value due to relatively short periods to maturity.
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component are summarized below:
| Foreign Currency Translation Adjustments | Unrealized Gain (Loss) on Investments, Net of Tax | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ||||||||||||||
| Other comprehensive gain (loss) before reclassification | ( | ( | ( | ||||||||||||||
| Amount reclassified from accumulated other comprehensive income (loss) | |||||||||||||||||
| Net current period other comprehensive income (loss) | ( | ( | ( | ||||||||||||||
| Balance at June 30, 2022 | $ | ( | $ | ( | $ | ( | |||||||||||
Deferred Revenue
Details of our total deferred revenue balance are as follows:
| Total Deferred Revenue | |||||
| (in thousands) | |||||
| Balance at December 31, 2021 | $ | ||||
| Deferred revenue recognized | ( | ||||
| Additional amounts deferred | |||||
| Deferred revenue acquired in business combinations | |||||
| Balance at June 30, 2022 | $ | ||||
We expect to recognize revenue related to these remaining performance obligations as of June 30, 2022 as follows:
| Revenue Recognition Expected by Period | |||||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | More than 3 years | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Expected recognition of deferred revenue | $ | $ | $ | $ | |||||||||||||||||||
15
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Deferred Commissions
Details of our deferred commissions balance are as follows:
| Deferred Commissions | |||||||||||
| (in thousands) | |||||||||||
| Balance at December 31, 2021 | $ | ||||||||||
| Commissions capitalized | |||||||||||
| Amortization recognized | ( | ||||||||||
| Balance at June 30, 2022 | $ | ||||||||||
| June 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Classified as: | |||||||||||
| Current | $ | $ | |||||||||
| Non-current | |||||||||||
| Total deferred commissions | $ | $ | |||||||||
Cost of Revenue
Amortization of Acquired Technologies. Amortization of acquired technologies included in cost of revenue relate to our licensed products and subscription products as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Amortization of acquired license technologies | $ | $ | $ | $ | |||||||||||||||||||
| Amortization of acquired subscription technologies | |||||||||||||||||||||||
| Total amortization of acquired technologies | $ | $ | $ | $ | |||||||||||||||||||
The decreases in amortization of acquired license technologies for the three and six months ended June 30, 2022 in comparison to the same periods in 2021 were primarily due to certain intangible assets acquired in connection with the Take Private being fully amortized during the periods ended June 30, 2022.
3. Discontinued Operations
As discussed in Note 1. Organization and Nature of Operations, we completed the Separation of the N‑able business into a newly created and separately traded public company, N-able, Inc., on July 19, 2021. The Separation was achieved through the transfer of all the net assets and legal entities associated with the N-able business to N-able, Inc.
In accordance with applicable accounting guidance, the results of the N-able business are presented as discontinued operations for the period up to and including the date of the Separation, and, as such, have been excluded from continuing operations for all periods presented.
16
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table summarizes the results of operations of N-able presented as discontinued operations:
| Three Months Ended | Six Months Ended | ||||||||||
| June 30, 2021 | |||||||||||
| (in thousands) | |||||||||||
| Revenue: | |||||||||||
| Subscription | $ | $ | |||||||||
| Maintenance | |||||||||||
| Total recurring revenue | |||||||||||
| License | |||||||||||
| Total revenue | |||||||||||
| Cost of revenue: | |||||||||||
| Cost of recurring revenue | |||||||||||
| Amortization of acquired technologies | |||||||||||
| Total cost of revenue | |||||||||||
| Gross profit | |||||||||||
| Operating expenses: | |||||||||||
| Sales and marketing | |||||||||||
| Research and development | |||||||||||
| General and administrative | |||||||||||
| Amortization of acquired intangibles | |||||||||||
| Total operating expenses | |||||||||||
| Operating income from discontinued operations | |||||||||||
| Other expense: | |||||||||||
| Interest (expense) income, net | |||||||||||
| Other expense, net | ( | ( | |||||||||
| Total other expense | ( | ( | |||||||||
| Income from discontinued operations before income taxes | |||||||||||
| Income tax expense (benefit) | ( | ||||||||||
| Net income from discontinued operations, net of tax | $ | $ | |||||||||
4. Investments
17
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table summarizes our short-term investments as of June 30, 2022:
| June 30, 2022 | |||||||||||||||||||||||
| Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| Corporate bonds | ( | ||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Asset-backed securities | ( | ||||||||||||||||||||||
| Total short-term investments | $ | $ | $ | ( | $ | ||||||||||||||||||
The following table summarizes the fair value of our available-for-sale securities with unrealized losses aggregated by type of investment instrument and length of time those securities have been in a continuous unrealized loss position:
| Less Than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| As of June 30, 2022 | |||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
| Corporate bonds | ( | ( | |||||||||||||||||||||||||||||||||
| Asset-backed securities | ( | ( | |||||||||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||
The following table summarizes the contractual underlying maturities of our available-for-sale securities as of June 30, 2022:
| June 30, 2022 | |||||||||||
| Cost | Fair Value | ||||||||||
| (in thousands) | |||||||||||
| Due in one year or less | $ | $ | |||||||||
| Due after one year through five years | |||||||||||
| $ | $ | ||||||||||
5. Goodwill
The following table reflects the changes in goodwill for the six months ended June 30, 2022:
| (in thousands) | |||||
| Balance at December 31, 2021 | $ | ||||
| Acquisitions | |||||
| Goodwill impairment | ( | ||||
| Foreign currency translation and other adjustments | ( | ||||
| Balance at June 30, 2022 | $ | ||||
As of June 30, 2022, our accumulated goodwill impairment was $612.4 million. See Note 2. Summary of Significant Accounting Policies for discussion of the goodwill impairment recorded during the six months ended June 30, 2022.
18
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
6. Fair Value Measurements
The following table summarizes the fair value of our financial assets that were measured on a recurring basis as of June 30, 2022 and December 31, 2021. There have been no transfers between fair value measurement levels during the six months ended June 30, 2022.
Fair Value Measurements at June 30, 2022 Using | |||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Total cash equivalents | |||||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Asset-backed securities | |||||||||||||||||||||||
| Total short-term investments | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
Fair Value Measurements at December 31, 2021 Using | |||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Total cash equivalents | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
As of June 30, 2022 and December 31, 2021, the carrying value of our long-term debt approximates its estimated fair value as the interest rate on the debt agreements is adjusted for changes in the market rates. See Note 7. Debt for additional information regarding our debt.
The fair value of our non-financial assets and liabilities, which include goodwill, intangible assets and property, plant and equipment, are measured on a non-recurring basis. Fair value adjustments are made in the period an impairment charge is recognized. During the three months ended June 30, 2022 we recognized impairment charges of $612.4 million and $9.4 million related to our goodwill and our trade name indefinite-lived intangible asset, respectively. The fair value of our reporting unit and indefinite-lived intangible asset are classified as Level 3 within the fair value hierarchy due to the significant unobservable inputs developed using company-specific information. For additional information, see the discussion of our impairment charges in Note 2. Summary of Significant Accounting Policies - Impairment of Goodwill, Intangible Assets and Long-lived Assets, including the valuation methods and inputs used in the fair value measurements.
19
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
7. Debt
The following table summarizes information relating to our debt:
| June 30, | December 31, | ||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Amount | Effective Rate | Amount | Effective Rate | ||||||||||||||||||||
| (in thousands, except interest rates) | |||||||||||||||||||||||
| Revolving credit facility | $ | % | $ | % | |||||||||||||||||||
| First Lien Term Loan (as amended) due Feb 2024 | % | % | |||||||||||||||||||||
| Total principal amount | |||||||||||||||||||||||
| Unamortized discount and debt issuance costs | ( | ( | |||||||||||||||||||||
| Total debt | |||||||||||||||||||||||
| Less: Current portion of long-term debt | ( | ( | |||||||||||||||||||||
| Total long-term debt | $ | $ | |||||||||||||||||||||
Senior Secured First Lien Credit Facilities
Our first lien credit agreement, as amended, or First Lien Credit Agreement, provides for senior secured first lien credit facilities, consisting of the following as of June 30, 2022:
•a $1.99 billion U.S. dollar term loan, or First Lien Term Loan, with a final maturity date of February 5, 2024; and
•a $117.5 million revolving credit facility (with a letter of credit sub-facility in the amount of $35.0 million), or the Revolving Credit Facility, consisting of (i) a $100.0 million multicurrency tranche and (ii) a $17.5 million tranche available only in U.S. dollars, with a final maturity date of August 5, 2023.
Borrowings under our Revolving Credit Facility bear interest at a floating rate which is, at our option, either (1) a Eurodollar rate for a specified interest period plus an applicable margin of 2.50 % or (2) a base rate plus an applicable margin of 1.50 %, respectively. The Eurodollar rate applicable to the Revolving Credit Facility is subject to a “floor” of 0.0 %.
Borrowings under our First Lien Term Loan bear interest at a floating rate which is, at our option, either (1) a Eurodollar rate for a specified interest period plus an applicable margin of 2.75 % or (2) a base rate plus an applicable margin of 1.75 %, respectively. The Eurodollar rate applicable to the First Lien Term Loan is subject to a “floor” of 0.0 %.
The Eurodollar rate is equal to an adjusted London Interbank Offered Rate, or LIBOR, for a one-, two-, three- or six-month interest period with a LIBOR floor of 0 %. The base rate for any day is a fluctuating rate per annum equal to the highest of (a) the rate of interest in effect for such day as publicly announced by Credit Suisse as its “prime rate” and (b) the federal funds effective rate in effect on such day plus 0.50 % and (c) the one-month adjusted LIBOR plus 1.0 % per annum.
The First Lien Term Loan requires equal quarterly repayments equal to 0.25 % of the original principal amount.
In addition to paying interest on loans outstanding under the Revolving Credit Facility and the First Lien Term Loan, we are required to pay a commitment fee of 0.50 % per annum of unused commitments under the Revolving Credit Facility. The commitment fee is subject to a reduction to 0.375 % per annum based on our first lien net leverage ratio.
The First Lien Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to: incur additional indebtedness; incur liens; engage in mergers, consolidations, liquidations or dissolutions; pay dividends and distributions on, or redeem, repurchase or retire our capital stock; and make certain investments, acquisitions, loans, or advances. In addition, the terms of the First Lien Credit Agreement include a financial covenant which requires that, at the end of each fiscal quarter, if the aggregate amount of borrowings under the Revolving Credit Facility exceeds 35 % of the aggregate commitments under the Revolving Credit Facility, our first lien net leverage ratio cannot exceed 7.40 to 1.00. The First Lien Credit Agreement also contains certain customary representations and warranties, affirmative covenants and events of default. As of June 30, 2022, we were in compliance with all covenants of the First Lien Credit Agreement.
20
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
8. Earnings (Loss) Per Share
A reconciliation of the number of shares in the calculation of basic and diluted earnings (loss) per share follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Basic earnings (loss) per share | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss from continuing operations | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net income from discontinued operations | |||||||||||||||||||||||
| Net loss | ( | ( | ( | ( | |||||||||||||||||||
| Earnings allocated to unvested restricted stock | |||||||||||||||||||||||
| Net loss from continuing operations available to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net income from discontinued operations available to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average common shares outstanding used in computing basic net earnings (loss) per share | |||||||||||||||||||||||
| Diluted net earnings (loss) per share | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss from continuing operations available to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net income from discontinued operations available to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average shares used in computing basic net earnings (loss) per share | |||||||||||||||||||||||
| Add dilutive impact of employee equity plans | |||||||||||||||||||||||
| Weighted-average shares used in computing diluted net earnings (loss) per share | |||||||||||||||||||||||
The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of the diluted net income (loss) per share attributable to common stockholders for the periods presented because their effect would have been anti-dilutive or for which the performance condition had not been met at the end of the period:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Total anti-dilutive shares | |||||||||||||||||||||||
21
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
9. Income Taxes
For the three months ended June 30, 2022 and 2021, we recorded income tax expense from continuing operations of $7.9 million and income tax benefit of $2.1 million, respectively, resulting in an effective tax rate of (1.3 )% and 8.8 %, respectively. For the six months ended June 30, 2022 and 2021, we recorded income tax expense from continuing operations of $7.7 million and income tax benefit $7.0 million, respectively, resulting in an effective tax rate of (1.2 )% and 13.8 %, respectively. The decrease in the effective tax rate for the three and six months ended June 30, 2022 compared to the same periods in 2021 was primarily due to the effect of the goodwill impairment charge, which is primarily non-deductible for income tax purposes.
Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. At June 30, 2022, we had accrued interest and penalties related to unrecognized tax benefits of approximately $3.1 million.
We establish valuation allowances when necessary to reduce deferred tax assets to amounts expected to be realized. During the three months ended June 30, 2022, as a result of the goodwill impairment charge, we increased our valuation allowance primarily related to the component of tax-deductible goodwill.
10. Commitments and Contingencies
Cyber Incident
As previously disclosed, we were the victim of a cyberattack on our Orion Software Platform and internal systems, or the Cyber Incident. We, together with our partners, have undertaken extensive measures to investigate, contain, eradicate, and remediate the Cyber Incident.
Expenses Incurred
For the three months ended June 30, 2022, we recorded pretax gross expenses related to the Cyber Incident of $3.7 million, primarily included in general and administrative expense in the condensed consolidated statements of operations. For the three months ended June 30, 2021, we recorded pretax gross expenses related to the Cyber Incident of $13.6 million, partially offset by proceeds under our insurance coverage of $2.9 million, for pretax net expenses of $10.7 million. For the three months ended June 30, 2021, we have included $0.7 million of these gross expenses in cost of recurring revenue, $0.8 million in sales and marketing expense and $12.2 million in general and administrative expense in the condensed consolidated statements of operations.
For the six months ended June 30, 2022, we recorded pretax gross expenses related to the Cyber Incident of $9.5 million and have included $0.2 million of these gross expenses in cost of recurring revenue, $0.1 million in sales and marketing expense and $9.2 million in general and administrative expense in the condensed consolidated statements of operations. For the six months ended June 30, 2021, we recorded pretax gross expenses related to the Cyber Incident of $34.0 million, partially offset by proceeds under our insurance coverage of $13.1 million, for pretax net expenses of $20.9 million. For the six months ended June 30, 2021, we have included $1.5 million of these gross expenses in cost of recurring revenue, $1.5 million in sales and marketing expense and $31.0 million in general and administrative expense in the condensed consolidated statements of operations.
General and administrative expense is presented net of insurance proceeds in the condensed consolidated statements of operations. Expenses include one-time costs to investigate and remediate the Cyber Incident, and legal and other professional services related thereto, and consulting services being provided to customers at no charge, all of which were expensed as incurred.
Litigation, Claims and Government Investigations
As a result of the Cyber Incident, we are subject to multiple lawsuits and investigations. A consolidated putative class action lawsuit alleging violations of the federal securities laws is pending against us and certain of our current and former officers. The complainants sought certification of a class of all persons who purchased or otherwise acquired our securities between October 18, 2018 and December 17, 2020 and seek unspecified monetary damages, costs and attorneys’ fees. In August 2021, the Company and all other named defendants in the securities class action filed motions to dismiss the
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SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
consolidated class action complaint. On March 30, 2022, the District Court for the Western District of Texas entered an order denying the Company's motion to dismiss. Discovery has commenced in the action. In addition, two shareholder derivative actions, purportedly on behalf of the Company, are pending, one in the Western District of Texas and one in the Delaware Court of Chancery, in each case asserting breach of duty and other claims against certain of our current and former officers and directors in connection with the Cyber Incident. In January 2022, the Company and all other named defendants filed motions to dismiss the Delaware derivative complaint which is pending before the court. We dispute the allegations in these complaints and intend to defend against the claims.
In addition, there are underway numerous investigations and inquiries by domestic and foreign law enforcement and other governmental authorities related to the Cyber Incident, including from the Department of Justice, the Securities and Exchange Commission, and various state Attorneys General. We are cooperating and providing information in connection with these investigations and inquiries and are incurring, and in future periods expect to incur, costs and other expenses in connection with these investigations and inquiries.
While we believe it is reasonably possible that we could incur losses associated with these proceedings and investigations, it is not possible to estimate the amount of any loss or range of possible loss that might result from adverse judgments, settlements, penalties or other resolutions of such proceedings and investigations based on the early stage thereof, the fact that alleged damages have not been specified, the uncertainty as to the certification of a class or classes and the size of any certified class, as applicable, and the lack of resolution on significant factual and legal issues. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. Losses associated with any adverse judgments, settlements, penalties or other resolutions of such proceedings and investigations could be material to our business, results of operations, financial condition or cash flows in future periods.
Additional lawsuits and claims related to the Cyber Incident may be asserted by or on behalf of customers, stockholders or others seeking damages or other related relief and additional inquiries from governmental agencies may be received or investigations by governmental agencies commenced.
Insurance Coverage
We maintain $15 million of cybersecurity insurance coverage to limit our exposure to losses such as those related to the Cyber Incident, which we renewed in June 2022. As of June 30, 2022, we had received insurance proceeds payments of $15 million for costs incurred related to the Cyber Incident. In addition, we maintain $50 million of directors and officers liability insurance coverage to reduce our exposure to our indemnification obligations for certain expenses incurred by our directors and officers, including as a result of the legal proceedings related to the Cyber Incident.
Indemnification
In connection with the Separation, we entered into a separation and distribution agreement and related agreements with N‑able to govern the Separation and related transactions and the relationship between the respective companies going forward. The separation and distribution agreement provides for certain indemnity and liability obligations, including that we will indemnify N-able for all liabilities based upon, arising out of or related to the Cyber Incident other than certain specified expenses for which N-able will be responsible. The amount of the indemnification liability, if any, cannot be determined and has not been recorded in our condensed consolidated financial statements as of June 30, 2022.
Other Matters
In addition to the Cyber Incident described above, from time to time we are involved in litigation arising from the normal course of business. In management's opinion, this litigation is not expected to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially and adversely from those anticipated in the forward-looking statements. Please see the section entitled “Safe Harbor Cautionary Statement” above and the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of the uncertainties, risks and assumptions associated with these statements. The following discussion and analysis also includes a discussion of certain non-GAAP financial measures. For a description and reconciliation of the non-GAAP measures discussed in this section, see “Non-GAAP Financial Measures.”
Overview
SolarWinds is a leading provider of simple, powerful, and secure information technology, or IT, management software. Our solutions give organizations worldwide, regardless of type, size or complexity, the power to accelerate business transformation in today's hybrid IT environments. We combine customer-driven products with an "inside-first" sales model to grow our business while also generating significant cash flow.
We offer a broad portfolio of solutions designed to help technology professionals to monitor, manage and optimize networks, systems, desktops, applications, storage, databases, website infrastructures and IT service desks. We intend to continue to innovate and invest in areas of product development that bring new products to market and enhance the functionality, ease of use and integration of our current products. We believe this will strengthen the overall value proposition of our products in any IT environment.
On February 5, 2016, we were acquired by affiliates of Silver Lake Group, L.L.C and Thoma Bravo, LLC in a take private transaction, or the Take Private. We applied purchase accounting on the date of the Take Private. In October 2018, we completed our initial public offering, or IPO, and once again become a publicly traded company.
Spin-Off of N-able Business
On July 19, 2021, we completed the separation and distribution of our managed service provider (“N-able”) business into a newly created and separately traded public company, N-able, Inc. We refer to this transaction as the “Separation.” After the distribution, we do not beneficially own any shares of common stock in N-able and no longer consolidate N‑able into our financial results for periods ending after July 19, 2021. As a result, N‑able's historical financial results through the Separation are reflected in our consolidated financial statements as discontinued operations.
We incurred $13.2 million of costs in connection with the Separation during the three months June 30, 2021 and $0.2 million and $23.1 million for the six months ended June 30, 2022 and 2021, respectively. We incurred insignificant costs in connection with the Separation for the three months ended June 30, 2022. Spin-off costs incurred in the three and six months ended June 30, 2021 are primarily reflected in our condensed consolidated statements of operations as discontinued operations. These costs include legal, accounting and advisory fees, implementation and integration costs, duplicative costs for subscriptions and information technology systems, employee and contract costs and other incremental separation costs related to the Separation. Of these amounts, the spin-off costs included in continuing operations were $0.5 million for the three months ended June 30, 2021 and $0.2 million and $0.8 million for the six months ended June 30, 2022 and 2021, respectively. We do not expect to incur significant spin-off costs in 2022.
See Note 3. Discontinued Operations in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional discussion of the Separation.
Cyber Incident
As previously disclosed, we were the victim of a cyberattack on our Orion Software Platform and internal systems, or the “Cyber Incident.” We, together with our partners, have undertaken extensive measures to investigate, contain, eradicate, and remediate the Cyber Incident. In addition, as part of our “Secure by Design” initiative, we continue to work with industry experts to implement enhanced security practices designed to further strengthen and protect our products and environment against these and other types of attacks in the future.
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Expenses
For the three months ended June 30, 2022, we recorded pretax gross expenses related to the Cyber Incident of $3.7 million, primarily included in general and administrative expense in the condensed consolidated statements of operations. For the three months ended June 30, 2021, we recorded pretax gross expenses related to the Cyber Incident of $13.6 million, partially offset by proceeds under our insurance coverage of $2.9 million, for pretax net expenses of $10.7 million. For the three months ended June 30, 2021, we have included $0.7 million of these gross expenses in cost of recurring revenue, $0.8 million in sales and marketing expense and $12.2 million in general and administrative expense in the condensed consolidated statements of operations.
For the six months ended June 30, 2022, we recorded pretax gross expenses related to the Cyber Incident of $9.5 million and have included $0.2 million of these gross expenses in cost of recurring revenue, $0.1 million in sales and marketing expense and $9.2 million in general and administrative expense in the condensed consolidated statements of operations. For the six months ended June 30, 2021, we recorded pretax gross expenses related to the Cyber Incident of $34.0 million, partially offset by proceeds under our insurance coverage of $13.1 million, for pretax net expenses of $20.9 million. For the six months ended June 30, 2021, we have included $1.5 million of these gross expenses in cost of recurring revenue, $1.5 million in sales and marketing expense and $31.0 million in general and administrative expense in the condensed consolidated statements of operations.
General and administrative expense is presented net of insurance proceeds in the condensed consolidated statements of operations. Expenses include one-time costs to investigate and remediate the Cyber Incident, and legal and other professional services related thereto, and consulting services being provided to customers at no charge, all of which were expensed as incurred. Our "Secure By Design" initiatives which include costs to enhance our security measures across our systems and our software development and build environments, have increased our ongoing expenses by approximately $20 million on an annual basis. These costs are primarily included in research and development expense, as well as general and administrative expense.
Litigation, Claims and Government Investigations
As a result of the Cyber Incident, we are subject to numerous lawsuits and investigations or inquiries as described in Note 10. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q. While we will incur costs and other expenses associated with these proceedings and investigations, it is not possible to estimate the amount of any loss or range of possible loss that might result from adverse judgments, settlements, penalties or other resolutions of such proceedings and investigations based on the early stage thereof, the fact that alleged damages have not been specified, the uncertainty as to the certification of a class or classes and the size of any certified class, as applicable, and the lack of resolution on significant factual and legal issues. We will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.
Future Costs
We expect to continue to incur additional legal and other professional services costs and expenses associated with the Cyber Incident in future periods. We expect to recognize these expenses as services are received. Costs related to the Cyber Incident that will be incurred in future periods may include increased expenses associated with ongoing claims, investigations and inquiries, and any new claims, investigations and inquiries, as well as increased customer support activities and other related matters. See Note 10. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for information related to the legal proceedings and governmental investigations related to the Cyber Incident. While we will incur costs and other expenses associated with these proceedings and investigations, it is currently not possible to estimate the amount of any loss or range of possible loss that might result from adverse judgments, settlements, penalties or other resolutions of such proceedings and investigations based on the early stage thereof, the fact that alleged damages have not been specified, the uncertainty as to the certification of a class or classes and the size of any certified class, as applicable, and the lack of resolution on significant factual and legal issues.
In addition, we expect to incur increased expenses for insurance, finance, compliance activities, and to meet increased legal and regulatory requirements. In addition, in connection with the Separation, we entered into a separation and distribution agreement and related agreements with N-able to govern the Separation and related transactions and the relationship between the respective companies going forward. The separation and distribution agreement provides for certain indemnity and liability obligations, including that we will indemnify N-able for all liabilities based upon, arising out of or related to the Cyber Incident other than certain specified expenses for which N-able will be responsible. Although the ultimate magnitude and timing of expenses or other impacts to our business or reputation related to the Cyber Incident are uncertain, they could be significant.
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Insurance Coverage
We maintain $15 million of cybersecurity insurance coverage to limit our exposure to losses such as those related to the Cyber Incident, which we renewed in June 2022. As of June 30, 2022, we had received insurance proceeds payments of $15 million for costs incurred related to the Cyber Incident. In addition, we maintain $50 million of directors and officers liability insurance coverage to reduce our exposure to our indemnification obligations for certain expenses incurred by our directors and officers, including as a result of the legal proceedings related to the Cyber Incident.
Impacts of COVID-19
We continue to monitor the impact from the changing market and economic conditions due to the COVID-19 pandemic on our business. While the impact of the COVID-19 pandemic contributed to a decline in our license revenue, based on current conditions, we do not expect to experience a significant ongoing impact related to the COVID-19 pandemic on our financial results in future periods. However, we are unable to predict with a level of precision the longer term impact, if any, that the COVID-19 pandemic may have on our business, results of operations and financial condition due to numerous uncertainties, including the duration of the pandemic, virus mutations and variants, the availability and efficacy of vaccines and boosters, the willingness of individuals to obtain vaccines and boosters, the pandemic's impact to the business of our customers and their end-customers and other factors identified in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. We will continue to evaluate the nature and extent of the impact of the COVID-19 pandemic to our business, consolidated results of operations and financial condition.
Impacts of Macroeconomic Conditions
As a global company, we are subject to risks and exposures from foreign currency exchange rate fluctuations caused by significant events with macroeconomic impacts, including, but not limited to, the conflict between Russia and Ukraine and resulting sanctions and other actions against Russia and Belarus, as well as market concerns related to inflation, changes in interest rates and supply chain disruption issues. During the second quarter of 2022, we suspended all of our business activities in Russia and Belarus, but such suspension has not had, and we do not expect it to have, a material impact on our financial results. Foreign currency exchange rate fluctuations have to date, and may continue through the remainder of 2022, to negatively impact our revenues. Although we continuously monitor the direct and indirect impacts of these events on our business and financial results, as well as the overall global economy, the broader implications of these macroeconomic events on our results of operation remain uncertain. See Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for further discussion of the possible impacts of these macroeconomic conditions on our business and financial results.
Second Quarter Highlights
Below are our key financial highlights from continuing operations for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.
Customers
Our approach allows us to both sell to a broad group of potential customers and close large transactions with significant customers. As of June 30, 2022, we had over 300,000 customers after giving effect to the Separation. While some customers may spend as little as $100 with us over a twelve-month period, we had 879 customers who spent more than $100,000 with us for the trailing twelve-month period ended June 30, 2022 as compared to 775 for the twelve-month period ended June 30, 2021, as adjusted to exclude customers of the N-able business.
We define customers as individuals or entities that have purchased one or more of our products under a unique customer identification number since our inception for our perpetual license products and individuals or entities that have an active subscription for at least one of our subscription products. Each unique customer identification number constitutes a separate customer regardless of the amount purchased. We may have multiple purchasers of our products within a single organization, each of which may be assigned a unique customer identification number and deemed a separate customer.
Annual Recurring Revenue (ARR)
We use Subscription Annual Recurring Revenue, or Subscription ARR, and Total Annual Recurring Revenue, or Total ARR, to better understand and assess the performance of our business, as our mix of revenue generated from recurring revenue has increased in recent years. Subscription ARR and Total ARR each provides a normalized view of customer retention, renewal and expansion, as well as growth from new customers. Subscription ARR and Total ARR should each be viewed independently of revenue and deferred revenue and are not intended to be combined with or to replace either of those items.
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| As of June 30, | Year-over-Year Growth | ||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
Subscription ARR(1) | $ | 148,277 | $ | 119,189 | 24.4 | % | |||||||||||
Total ARR(2) | 625,496 | 621,072 | 0.7 | ||||||||||||||
(1)Subscription ARR represents the annualized recurring value of all active subscription contracts at the end of a reporting period.
(2)Total ARR represents the sum of Subscription ARR and the annualized value of all maintenance contracts related to perpetual licenses active at the end of a reporting period.
The year-over-year growth in Subscription ARR was primarily driven by sales of our time-based subscription offerings as a result of customers transitioning to our subscription products and pricing models, as well as sales of our service desk and database monitoring solutions. Total ARR increased slightly due to growth in Subscription ARR which was partially offset by a decline in the annualized value of maintenance contracts as a result of lower new perpetual license sales and the impact of customers transitioning to our time-based subscription offerings, along with the effect of the weakening of most foreign currencies relative to the U.S. dollar.
Components of Our Results of Operations
Revenue
Our revenue consists of recurring revenue and perpetual license revenue.
•Recurring Revenue. The significant majority of our revenue is recurring and consists of subscription and maintenance revenue.
•Subscription Revenue. We primarily derive subscription revenue from fees received for subscriptions to our SaaS offerings, and to a lesser extent, our time-based license arrangements. We recognize revenue for SaaS offerings ratably over the subscription term once the service is made available to the customer or when we have the right to invoice services performed. We also offer time-based subscription offerings for many of our products historically sold as perpetual licenses, such as our network, systems and database management products, to give customers additional flexibility when purchasing our products. The time-based subscription offerings are recognized at a point in time upon delivery of the on-premise software and support is recognized ratably over the contract period. We generally invoice subscription agreements in advance over the subscription period on either a monthly or annual basis and to a lesser extent, monthly based on usage. Our subscription revenue grows as customers add new subscription products, upgrade the capacity level of their existing subscription products or increase the usage of their subscription products.
•Maintenance Revenue. We derive maintenance revenue from the sale of maintenance services associated with our perpetual license products. Perpetual license customers pay for maintenance services based on the products they have purchased. We recognize maintenance revenue ratably on a daily basis over the contract period. Our maintenance revenue grows when we renew existing maintenance contracts and add new perpetual license customers, and as existing customers add new products. In addition, we typically implement annual price increases for our maintenance services. Customers typically renew their maintenance contracts at our standard list maintenance renewal pricing for their applicable products. We generally invoice maintenance contracts annually in advance.
•License Revenue. We derive license revenue from sales of perpetual licenses of our on-premise network, systems, storage and database management products to new and existing customers. We include one year of maintenance services as part of our customers’ initial license purchase. License revenue is recognized at a point in time upon delivery of the electronic license key. We allocate revenue to the license component based upon our estimated standalone selling prices, which is derived by evaluating our historical pricing and discounting practices in observable bundled transactions.
We plan to continue to sell perpetual licenses for our network, systems and database management products and not require customers to transition to a subscription pricing model discussed above. The subscription pricing option, and our continued efforts to increase subscription revenue, may impact the mix of license and recurring revenue, but this impact is difficult to predict at this time due to uncertainty regarding the level of customer adoption of the new subscription pricing options. We expect a continued shift in the mix between license and recurring revenue in each quarter as new customers purchase these
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subscription offerings. Our license sales and maintenance renewal rates may decline or fluctuate in future periods as customers transition to our subscription offerings and as a result of the Cyber Incident.
Cost of Revenue
•Cost of Recurring Revenue. Cost of recurring revenue primarily consists of technical support personnel costs, public cloud infrastructure and hosting fees and an allocation of overhead costs for our subscription revenue and maintenance services. Allocated costs consist of certain facilities, depreciation, benefits and IT costs allocated based on headcount. We expect our public cloud infrastructure and hosting fees to increase as we expand our subscription-based offerings.
•Amortization of Acquired Technologies. Amortization of acquired technologies consists of amortization related to capitalized costs of technologies acquired in connection with the Take Private and other acquisitions.
Operating Expenses
Operating expenses consists of sales and marketing, research and development and general and administrative expenses as well as amortization of acquired intangibles and goodwill impairment charges. Generally, personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, sales commissions, stock-based compensation and an allocation of overhead costs based on headcount. The total number of employees as of June 30, 2022 was 2,215, as compared to 2,116 as of June 30, 2021, which was adjusted to exclude employees of the N-able business.
We expect our operating expenses to continue to increase in absolute dollars as we make long-term investments in our business, including increasing our selling efforts toward enterprise customers. Our operating expenses in future periods also may increase in absolute dollars and fluctuate as a percentage of revenue as a result of any future acquisitions and any further decisions to increase our investment in our business. In addition, the Separation of the N-able business resulted in dis-synergies associated with increased overhead costs and duplicate hiring which increased certain expenses for 2021. Our stock-based compensation expense has increased due to equity awards granted to our employees and directors. We intend to continue to grant equity awards which will result in additional stock-based compensation expense in future periods. We have also seen our travel costs increase during the first half of 2022 and expect that they may continue to increase throughout the year as our employees begin to resume business travel activities.
•Sales and Marketing. Sales and marketing expenses primarily consist of related personnel costs, including our sales, marketing and maintenance renewal and subscription retention teams. Sales and marketing expenses also includes the cost of digital marketing programs such as paid search, search engine optimization and management, website maintenance and design. We expect to continue to hire personnel globally to drive new sales and maintenance renewals.
•Research and Development. Research and development expenses primarily consist of related personnel costs for our product development employees and executives and, to a lesser extent, contractor fees. We expect to continue to grow our research and development organization, particularly internationally. We capitalize certain research and development costs related to developing new functionality for our suite of products that are hosted and accessed by our customers on a subscription basis, which may cause our research and development expense to fluctuate from period to period.
•General and Administrative. General and administrative expenses primarily consist of personnel costs for our executive, finance, legal, human resources and other administrative personnel, general restructuring costs, acquisition costs, certain Cyber Incident costs, professional fees, certain non-cash impairment charges and other general corporate expenses. The Cyber Incident has resulted in increased general and administrative expenses which we expect to continue in 2022, although expenses may fluctuate from period to period depending on the timing of related activities.
•Amortization of Acquired Intangibles. We amortize to operating expenses the capitalized costs of intangible assets acquired in connection with the Take Private and our other acquisitions.
•Goodwill Impairment. We review our goodwill for impairment on an annual basis or more frequently if there is an indication that impairment may exist. An impairment of goodwill is recognized when the carrying value of our reporting unit exceeds its fair value as of the assessment date and recorded as a separate component of operating expenses.
Other Income (Expense)
Other income (expense) primarily consists of interest expense, interest income and gains (losses) resulting from changes in exchange rates on foreign currency denominated accounts. Our interest expense on our debt has increased due to increases in interest rates. We expect interest expense may continue to increase as a result of anticipated interest rate increases since our borrowings outstanding under our credit agreement currently bear interest at variable rates.
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Foreign Currency
As a global company, we face exposure to adverse movements in foreign currency exchange rates. Fluctuations in foreign currencies impact the amount of total assets, liabilities, revenue, operating expenses and cash flows that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for additional information on how foreign currency impacts our financial results.
Income Tax Expense (Benefit)
Income tax expense (benefit) consists of domestic and foreign corporate income taxes related to the sale of products. The tax rate on income earned by our North American entities is higher than the tax rate on income earned by our international entities. We expect the income earned by our international entities to grow over time as a percentage of total income, which could result in a decline in our effective income tax rate. However, our effective tax rate will be affected by many other factors including changes in tax laws, regulations or rates, new interpretations of existing laws or regulations, shifts in the allocation of income earned throughout the world and changes in overall levels of income before tax.
Comparison of the Three Months Ended June 30, 2022 and 2021
Revenue
| Three Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Subscription | $ | 36,980 | 21.0 | % | $ | 29,608 | 16.7 | % | $ | 7,372 | |||||||||||||||||||
| Maintenance | 113,972 | 64.8 | 120,502 | 68.2 | (6,530) | ||||||||||||||||||||||||
| Total recurring revenue | 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 $0.8 million, or 0.4%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 primarily due to decreases in license and maintenance revenue, partially offset by an increase in subscription revenue. Revenue from North America was approximately 69% of total revenue for both the three months ended June 30, 2022 and 2021. Other than the United States, no single country accounted for 10% or more of our total revenue during these periods. We expect our international total revenue to increase slightly as a percentage of total revenue as we expand our international sales and marketing efforts across our product lines.
Macroeconomic conditions, such as foreign currency exchange rate fluctuations, inflation, changes in interest rates and supply chain disruption issues, as well as the Cyber Incident have negatively impacted revenue, profitability and cash flows and may continue to do so throughout 2022 and beyond. The weakening of most foreign currencies relative to the U.S. dollar had a negative impact on our revenues for the three month period ended June 30, 2022. In addition, certain of our customers have, and others may, defer renewals or cancel subscriptions which has had, and could in the future have, a negative impact on our revenue. However, despite the impact of macroeconomic conditions and the Cyber Incident, our maintenance renewal rate for the trailing twelve month period was 91%.
Recurring Revenue
Subscription Revenue. Subscription revenue increased $7.4 million, or 24.9%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to increased sales of our time-based subscription offerings resulting from customers transitioning to our subscription pricing model. Our subscription revenue increased as a percentage of our total revenue for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.
Our net retention rate for our subscription products was as follows:
| Trailing Twelve-Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
Net retention rate(1) | 97 | % | 96 | % | |||||||
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(1)Net retention rate for subscription products represents the implied monthly subscription revenue at the end of a period for the base set of customers from which we generated subscription revenue in the year prior to the calculation, divided by the implied monthly subscription revenue one year prior to the date of the calculation for that same customer base.
Maintenance Revenue. Maintenance revenue decreased $6.5 million, or 5.4%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to the impact on maintenance revenue from decreased sales of our licensed products, customers transitioning to our time-based subscription offerings, the effect of the weakening of most foreign currencies relative to the U.S. dollar and the continuing impact of the decline in our maintenance renewal rate primarily due to the Cyber Incident.
Our maintenance renewal rate for our perpetual license products was as follows:
| Trailing Twelve-Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
Maintenance renewal rate(1) | 91 | % | 90 | % | |||||||
_______
(1)Maintenance renewal rate represents the sales of maintenance services for all existing maintenance contracts expiring in a period, divided by the sum of previous sales of maintenance services corresponding to those services expiring in the current period. The calculation of maintenance renewal rate only includes customers renewing maintenance contracts and excludes all customers that transition from maintenance contracts to subscription offerings. Sales of maintenance services includes sales of maintenance renewals for a previously purchased product and the amount allocated to maintenance revenue from a license purchase.
License Revenue
License revenue decreased $1.6 million, or 6.0%, primarily due to an increase in the subscription sales of our network, systems and database management products that have historically been sold only as perpetual licenses and the effect of the weakening of most foreign currencies relative to the U.S. dollar.
Cost of Revenue
| Three Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Cost of recurring revenue | $ | 15,460 | 8.8 | % | $ | 15,728 | 8.9 | % | $ | (268) | |||||||||||||||||||
| Amortization of acquired technologies | 3,648 | 2.1 | 40,098 | 22.7 | (36,450) | ||||||||||||||||||||||||
| Total cost of revenue | $ | 19,108 | 10.9 | % | $ | 55,826 | 31.6 | % | $ | (36,718) | |||||||||||||||||||
Total cost of revenue decreased in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 primarily due to a decrease in amortization of acquired technologies due to certain intangible assets acquired in connection with the Take Private being fully amortized during the period. Cost of recurring revenue decreased primarily due to a decrease in costs related to the Cyber Incident of $0.6 million, partially offset by increases in public cloud infrastructure and hosting fees related to our subscription offerings.
Operating Expenses
| Three Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||
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Sales and Marketing. Sales and marketing expenses increased $6.5 million, or 11.3%, primarily due to increases in personnel costs of $5.2 million, marketing program costs of $1.0 million and travel costs of $0.8 million. These increases were partially offset by a decrease in public relation costs resulting from the Cyber Incident of $0.7 million. We have increased our sales and marketing employee headcount, and we expect to incur additional costs in future periods as we continue to expand our international sales teams and focus on enterprise customers.
Research and Development. Research and development expenses decreased $3.7 million, or 14.4%, primarily due to a decrease in personnel costs of $5.7 million, partially offset by increases in contract services of $1.4 million and travel costs of $0.3 million. The decrease in personnel costs was primarily due to an increase in employee turnover, as well as a $2.7 million increase in capitalized employee costs primarily related to our work on our Observability platform.
General and Administrative. General and administrative expenses increased $10.6 million, or 34.4%, primarily due to a $9.4 million non-cash impairment charge recognized during the period related to the SolarWinds trade name originally recorded in connection with the Take Private. See Note 2. Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information. In addition, the increase to general and administrative expenses also includes a $4.3 million increase in personnel costs, which includes a $3.2 million increase in stock-based compensation expense, in addition to a $2.2 million increase in directors and officers liability and cybersecurity insurance costs and professional fees. These increases were partially offset by a $5.6 million decrease in costs related to the Cyber Incident.
Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased $0.8 million, or 5.6% primarily due to certain acquired intangibles being fully amortized during the period and the impact of changes in foreign currency exchange rates.
Goodwill Impairment. As a result of the interim goodwill impairment analysis as of June 30, 2022, we recognized a $612.4 million non-cash goodwill impairment charge. See Note 2. Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information.
Interest Expense, Net
| Three Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Interest expense, net | $ | (18,401) | (10.5) | % | $ | (16,191) | (9.2) | % | $ | (2,210) | |||||||||||||||||||
Interest expense, net increased by $2.2 million, or 13.6%, in the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase in interest expense is primarily due to the increase in interest rates on our debt. The weighted-average effective interest rate on our debt was 3.5% for the three months ended June 30, 2022 compared to 2.9% for the three months ended June 30, 2021. See Note 7. Debt in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt.
Other Income (Expense), Net
| Three Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Other income (expense), net | $ | 726 | 0.4 | % | $ | (269) | (0.2) | % | $ | 995 | |||||||||||||||||||
Other income (expense), net increased by $1.0 million in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 primarily due to the impact of changes in foreign currency exchange rates related to various accounts for the period.
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Income Tax Expense (Benefit)
| Three Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Loss before income taxes | $ | (614,253) | (348.9) | % | $ | (24,006) | (13.6) | % | $ | (590,247) | |||||||||||||||||||
| Income tax expense (benefit) | 7,871 | 4.5 | (2,121) | (1.2) | 9,992 | ||||||||||||||||||||||||
| Effective tax rate | (1.3) | % | 8.8 | % | (10.1) | % | |||||||||||||||||||||||
Our income tax expense for the three months ended June 30, 2022 was $7.9 million as compared to an income tax benefit of $2.1 million for the three months ended June 30, 2021. The effective tax rate decreased to (1.3)% for the period primarily due to the effect of the goodwill impairment charge, which is primarily non-deductible for income tax purposes. For additional discussion about our income taxes, see Note 9. Income Taxes in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q.
Discontinued Operations
| Three Months Ended | |||||||||||
| June 30, 2021 | |||||||||||
| Amount | Percentage of Revenue | ||||||||||
| (in thousands, except percentages) | |||||||||||
| Total revenue | $ | 85,186 | 100.0 | % | |||||||
| Total cost of revenue | 12,825 | 15.1 | |||||||||
| Operating expenses | 61,524 | 72.2 | |||||||||
| Income before income taxes | 10,785 | 12.7 | |||||||||
| Income tax expense | 524 | 0.6 | |||||||||
| Income from discontinued operations, net of taxes | 10,261 | 12.0 | |||||||||
N‑able's historical financial results through the Separation date of July 19, 2021 are reflected in our condensed consolidated financial statements as discontinued operations.
Comparison of the Six Months Ended June 30, 2022 and 2021
Revenue
| Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Subscription | $ | 75,727 | 21.5 | % | $ | 57,925 | 16.5 | % | $ | 17,802 | |||||||||||||||||||
| Maintenance | 229,467 | 65.0 | 241,167 | 68.8 | (11,700) | ||||||||||||||||||||||||
| Total recurring revenue | 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 $2.3 million, or 0.6%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to an increase in subscription revenue, partially offset by decreases in license and maintenance revenue. Revenue from North America was approximately 69% of total revenue for both the six months ended June 30, 2022 and 2021. Other than the United States, no single country accounted for 10% or more of our total revenue during these periods. We expect our international total revenue to increase slightly as a percentage of total revenue as we expand our international sales and marketing efforts across our product lines.
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Recurring Revenue
Subscription Revenue. Subscription revenue increased $17.8 million, or 30.7%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to increased sales of our time-based subscription offerings resulting from customers transitioning to our subscription pricing model, as well as sales of our service desk and database monitoring solutions.
Our net retention rate for our subscription products was as follows:
| Trailing Twelve-Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
Net retention rate(1) | 97 | % | 96 | % | |||||||
_______
(1)Net retention rate for subscription products represents the implied monthly subscription revenue at the end of a period for the base set of customers from which we generated subscription revenue in the year prior to the calculation, divided by the implied monthly subscription revenue one year prior to the date of the calculation for that same customer base.
Maintenance Revenue. Maintenance revenue decreased $11.7 million, or 4.9%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to the impact on maintenance revenue from decreased sales of our licensed products, customers transitioning to our time-based subscription offerings, the effect of the weakening of most foreign currencies relative to the U.S. dollar and the continuing impact of the decline in our maintenance renewal rate primarily due to the Cyber Incident.
Our maintenance renewal rate for our perpetual license products was as follows:
| Trailing Twelve-Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
Maintenance renewal rate(1) | 91 | % | 90 | % | |||||||
_______
(1)Maintenance renewal rate represents the sales of maintenance services for all existing maintenance contracts expiring in a period, divided by the sum of previous sales of maintenance services corresponding to those services expiring in the current period. Sales of maintenance services includes sales of maintenance renewals for a previously purchased product and the amount allocated to maintenance revenue from a license purchase.
License Revenue
License revenue decreased $3.8 million, or 7.5%, primarily due to an increase in the subscription sales of our network, systems and database management products that have historically been sold only as perpetual licenses and the effect of the weakening of most foreign currencies relative to the U.S. dollar.
Cost of Revenue
| Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Cost of recurring revenue | $ | 33,291 | 9.4 | % | $ | 31,382 | 8.9 | % | $ | 1,909 | |||||||||||||||||||
| Amortization of acquired technologies | 20,875 | 5.9 | 80,515 | 23.0 | (59,640) | ||||||||||||||||||||||||
| Total cost of revenue | $ | 54,166 | 15.3 | % | $ | 111,897 | 31.9 | % | $ | (57,731) | |||||||||||||||||||
Total cost of revenue decreased in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to a decrease in amortization of acquired technologies due to certain intangible assets acquired in connection with the Take Private being fully amortized during the period. Cost of recurring revenue increased primarily due to increases in public cloud infrastructure and hosting fees related to our subscription products of $2.6 million, partially offset by a decrease in costs related to the Cyber Incident of $1.3 million.
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Operating Expenses
| Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||
Sales and Marketing. Sales and marketing expenses increased $9.9 million, or 8.6%, primarily due to increases in personnel costs of $7.8 million, marketing program costs of $1.7 million and travel costs of $1.1 million. These increases were partially offset by a decrease in public relation costs resulting from the Cyber Incident of $1.4 million. We have increased our sales and marketing employee headcount, and we expect to incur additional costs in future periods as we expand our international sales teams and focus on enterprise customers.
Research and Development. Research and development expenses decreased $6.7 million, or 12.8%, primarily due to a decrease in personnel costs of $10.8 million, partially offset by increases in contract services of $2.9 million and travel costs of $0.5 million. The decrease in personnel costs, which includes a $1.1 million decrease in stock-based compensation expense, was primarily due to an increase in employee turnover, as well as a $4.2 million increase in capitalized employee costs primarily related to our work on our Observability platform.
General and Administrative. General and administrative expenses increased $12.4 million, or 20.1%, primarily due to a $9.4 million non-cash impairment charge recognized during the period related to the SolarWinds trade name originally recorded in connection with the Take Private. See Note 2. Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information. In addition, the increase to general and administrative expenses also includes a $7.8 million increase in personnel costs, which includes a $5.6 million increase in stock-based compensation expense, in addition to a $3.4 million increase in directors and officers liability and cybersecurity insurance costs and professional fees. These increases were partially offset by a $8.7 million decrease in costs related to the Cyber Incident.
Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased $1.6 million, or 5.7%, primarily due to certain acquired intangibles being fully amortized during the period and the impact of changes in foreign currency exchange rates.
Goodwill Impairment. As a result of the interim goodwill impairment analysis as of June 30, 2022, we recognized a $612.4 million non-cash goodwill impairment charge. See Note 2. Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information.
Interest Expense, Net
| Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Interest expense, net | $ | (34,488) | (9.8) | % | $ | (32,365) | (9.2) | % | $ | (2,123) | |||||||||||||||||||
Interest expense, net increased by $2.1 million, or 6.6%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The increase in interest expense is primarily due to increases in interest rates on our debt. The weighted-average effective interest rate on our debt for the six months ended June 30, 2022 was 3.2% compared to 2.9% for the six months ended June 30, 2021. See Note 7. Debt in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt.
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Other Income (Expense), Net
| Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Other income (expense), net | $ | 557 | 0.2 | % | $ | 387 | 0.1 | % | $ | 170 | |||||||||||||||||||
Other income (expense), net increased by $0.2 million in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to the impact of changes in foreign currency exchange rates related to various accounts for the period.
Income Tax Expense (Benefit)
| Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Loss before income taxes | $ | (619,068) | (175.4) | % | $ | (50,666) | (14.4) | % | $ | (568,402) | |||||||||||||||||||
| Income tax expense (benefit) | 7,715 | 2.2 | (7,001) | (2.0) | 14,716 | ||||||||||||||||||||||||
| Effective tax rate | (1.2) | % | 13.8 | % | (15.0) | % | |||||||||||||||||||||||
Our income tax expense for the six months ended June 30, 2022 was $7.7 million as compared to an income tax benefit of $7.0 million for the six months ended June 30, 2021. The effective tax rate decreased to (1.2)% for the period primarily due to the effect of the goodwill impairment charge, which is primarily non-deductible for income tax purposes. For additional discussion about our income taxes, see Note 9. Income Taxes in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Discontinued Operations
| Six Months Ended | |||||||||||
| June 30, 2021 | |||||||||||
| Amount | Percentage of Revenue | ||||||||||
| (in thousands, except percentages) | |||||||||||
| Total revenue | $ | 168,232 | 100.0 | % | |||||||
| Total cost of revenue | 26,833 | 15.9 | % | ||||||||
| Operating expenses | 121,422 | 72.2 | % | ||||||||
| Income before income taxes | 19,396 | 11.5 | % | ||||||||
| Income tax benefit | (5,485) | (3.3) | % | ||||||||
| Income from discontinued operations, net of taxes | 24,881 | 14.8 | % | ||||||||
N‑able's historical financial results through the Separation date of July 19, 2021 are reflected in our consolidated financial statements as discontinued operations.
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Non-GAAP Financial Measures from Continuing Operations
In addition to financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures to clarify and enhance our understanding, and aid in the period-to-period comparison, of our performance. We believe that these non-GAAP financial measures provide supplemental information that is meaningful when assessing our operating performance because they exclude the impact of certain amounts that our management and board of directors do not consider part of core operating results when assessing our operational performance, allocating resources, preparing annual budgets and determining compensation. Accordingly, these non-GAAP financial measures may provide insight to investors into the motivation and decision-making of management in operating the business. Investors are encouraged to review the reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure included below. Unless noted otherwise, all non-GAAP financial measures are derived from our GAAP financial measures from continuing operations.
While we believe that these non-GAAP financial measures provide useful supplemental information, non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, their most comparable GAAP measures. These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be comparable to similarly titled measures of other companies due to potential differences in their financing and accounting methods, the book value of their assets, their capital structures, the method by which their assets were acquired and the manner in which they define non-GAAP measures. Items such as the amortization of intangible assets, stock-based compensation expense and related employer-paid payroll taxes, acquisition related adjustments, the Cyber Incident, restructuring costs and goodwill and indefinite-lived intangible asset impairment, as well as the related tax impacts of these items can have a material impact on our GAAP financial results.
Non-GAAP Revenue from Continuing Operations
We define non-GAAP total revenue as total revenue excluding the impact of purchase accounting from acquisitions. We historically monitored this measure to assess our performance because we believed our revenue growth rate would be overstated without this adjustment. We believed presenting non-GAAP total revenue aided in the comparability between periods and in assessing our overall operating performance. Beginning in the first quarter of 2022, we no longer adjust our GAAP revenue for the impact of purchase accounting.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Total GAAP revenue | $ | 176,034 | $ | 176,788 | $ | 352,902 | $ | 350,644 | |||||||||||||||
Impact of purchase accounting(1) | — | 55 | — | 134 | |||||||||||||||||||
| Total non-GAAP revenue | $ | 176,034 | $ | 176,843 | $ | 352,902 | $ | 350,778 | |||||||||||||||
(1)Adjustment represents the impact of purchase accounting to the subscription revenue line item. There were no adjustments to the maintenance revenue line item for the period presented.
Non-GAAP Operating Income and Non-GAAP Operating Margin from Continuing Operations
We provide non-GAAP operating income and related non-GAAP margin using non-GAAP revenue and excluding such items as the write-down of deferred revenue related to purchase accounting, amortization of acquired intangible assets, stock-based compensation expense and related employer-paid payroll taxes, acquisition and other costs, restructuring costs, Cyber Incident costs and goodwill and indefinite-lived intangible asset impairment. Management believes these measures are useful for the following reasons:
•Amortization of Acquired Intangible Assets. We provide non-GAAP information that excludes expenses related to purchased intangible assets associated with our acquisitions. We believe that eliminating this expense from our non-GAAP measures is useful to investors, because the amortization of acquired intangible assets can be inconsistent in amount and frequency and is significantly impacted by the timing and magnitude of our acquisition transactions, which also vary in frequency from period to period. Accordingly, we analyze the performance of our operations in each period without regard to such expenses.
•Stock-Based Compensation Expense and Related Employer-Paid Payroll Taxes. We provide non-GAAP information that excludes expenses related to stock-based compensation and related employer-paid payroll taxes. We believe that the exclusion of stock-based compensation expense provides for a better comparison of our operating results to prior periods and to our peer companies as the calculations of stock-based compensation vary from period to period and
36
company to company due to different valuation methodologies, subjective assumptions and the variety of award types. Employer-paid payroll taxes on stock-based compensation is dependent on our stock price and the timing of the taxable events related to the equity awards, over which our management has little control, and does not correlate to the core operation of our business. Because of these unique characteristics of stock-based compensation and related employer-paid payroll taxes, management excludes these expenses when analyzing the organization’s business performance.
•Acquisition and Other Costs. We exclude certain expense items resulting from acquisitions, such as legal, accounting and advisory fees, changes in fair value of contingent consideration, costs related to integrating the acquired businesses, deferred compensation, severance and retention expense. In addition, we exclude certain other costs including expenses related to our offerings. We consider these adjustments, to some extent, to be unpredictable and dependent on a significant number of factors that are outside of our control. Furthermore, acquisitions result in operating expenses that would not otherwise have been incurred by us in the normal course of our organic business operations. We believe that providing these non-GAAP measures that exclude acquisition and other costs, allows users of our financial statements to better review and understand the historical and current results of our continuing operations, and also facilitates comparisons to our historical results and results of less acquisitive peer companies, both with and without such adjustments.
•Restructuring Costs. We provide non-GAAP information that excludes restructuring costs such as severance and the estimated costs of exiting and terminating facility lease commitments, as they relate to our corporate restructuring and exit activities and costs related to the separation of employment with executives of the Company. In addition, we exclude certain costs, primarily legal and accounting fees, resulting from the spin-off of N-able reported in continuing operations. Spin-off costs incurred in historical periods are included in discontinued operations and therefore are no longer presented as a separate adjustment. These costs are inconsistent in amount and are significantly impacted by the timing and nature of these events. Therefore, although we may incur these types of expenses in the future, we believe that eliminating these costs for purposes of calculating the non-GAAP financial measures facilitates a more meaningful evaluation of our operating performance and comparisons to our past operating performance.
•Cyber Incident Costs. We exclude certain expenses resulting from the Cyber Incident. Expenses include costs to investigate and remediate the Cyber Incident, and legal and other professional services related thereto, and consulting services being provided to customers at no charge. Cyber Incident costs are provided net of expected and received insurance reimbursements, although the timing of recognizing insurance reimbursements may differ from the timing of recognizing the associated expenses. We expect to incur significant legal and other professional services expenses associated with the Cyber Incident in future periods. The Cyber Incident results in operating expenses that would not have otherwise been incurred by us in the normal course of our organic business operations. We believe that providing non-GAAP measures that exclude these costs facilitates a more meaningful evaluation of our operating performance and comparisons to our past operating performance. We continue to invest significantly in cybersecurity and expect to make additional investments. These estimated investments are in addition to the Cyber Incident costs and not included in the net Cyber Incident costs reported.
•Goodwill and Indefinite-lived Intangible Asset Impairment. We provide non-GAAP information that excludes non-cash goodwill and indefinite-lived intangible asset impairment charges. We believe that providing these non-GAAP measures that exclude these non-cash impairment charges allows users of our financial statements to better review and understand our historical and current operating results. In addition, as a significant portion of our goodwill and indefinite-lived intangible assets were derived from the Take Private transaction, providing these non-GAAP measures that exclude these impairment charges facilitates comparisons to our peers who may not have undertaken a transformational acquisition resulting in significant goodwill and indefinite-lived intangible assets.
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| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| GAAP operating loss from continuing operations | $ | (596,578) | $ | (7,546) | $ | (585,137) | $ | (18,688) | |||||||||||||||
| Impact of purchase accounting | — | 55 | — | 134 | |||||||||||||||||||
| Stock-based compensation expense and related employer-paid payroll taxes | 17,541 | 13,865 | 33,478 | 28,393 | |||||||||||||||||||
| Amortization of acquired technologies | 3,648 | 40,098 | 20,875 | 80,515 | |||||||||||||||||||
| Amortization of acquired intangibles | 13,103 | 13,882 | 26,342 | 27,920 | |||||||||||||||||||
| Acquisition and other costs | 118 | 245 | 286 | 1,171 | |||||||||||||||||||
| Restructuring costs | 7 | 1,565 | 1,430 | 2,300 | |||||||||||||||||||
| Cyber Incident costs, net | 3,748 | 10,732 | 9,464 | 20,895 | |||||||||||||||||||
| Goodwill and indefinite-lived intangible asset impairment | 621,760 | — | 621,760 | — | |||||||||||||||||||
| Non-GAAP operating income | $ | 63,347 | $ | 72,896 | $ | 128,498 | $ | 142,640 | |||||||||||||||
| GAAP operating margin | (338.9) | % | (4.3) | % | (165.8) | % | (5.3) | % | |||||||||||||||
| Non-GAAP operating margin | 36.0 | % | 41.2 | % | 36.4 | % | 40.7 | % | |||||||||||||||
Adjusted EBITDA and Adjusted EBITDA Margin from Continuing Operations
We regularly monitor adjusted EBITDA and adjusted EBITDA margin, as it is a measure we use to assess our operating performance. We define adjusted EBITDA as net income or loss, excluding the impact of purchase accounting on total revenue, amortization of acquired intangible assets and developed technology, depreciation expense, stock-based compensation expense and related employer-paid payroll taxes, restructuring costs, acquisition and other costs, Cyber Incident costs, goodwill and indefinite-lived intangible asset impairment charges, interest expense, net, debt related costs including fees related to our credit agreements, debt extinguishment and refinancing costs, unrealized foreign currency (gains) losses, and income tax expense (benefit). We define adjusted EBITDA margin as adjusted EBITDA divided by non-GAAP revenue. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; adjusted EBITDA excludes the impact of the write-down of deferred revenue due to purchase accounting in connection with our acquisitions, and therefore includes revenue that will never be recognized under GAAP; adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net income (loss) and our other GAAP results. In evaluating adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation of adjusted EBITDA. Adjusted EBITDA is not a presentation made in accordance with GAAP and the use of the term varies from others in our industry.
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| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands, except margin data) | |||||||||||||||||||||||
| Net loss from continuing operations | $ | (622,124) | $ | (21,885) | $ | (626,783) | $ | (43,665) | |||||||||||||||
| Amortization and depreciation | 20,131 | 57,653 | 54,059 | 116,008 | |||||||||||||||||||
| Income tax expense (benefit) | 7,871 | (2,121) | 7,715 | (7,001) | |||||||||||||||||||
| Interest expense, net | 18,401 | 16,191 | 34,488 | 32,365 | |||||||||||||||||||
| Impact of purchase accounting on total revenue | — | 55 | — | 134 | |||||||||||||||||||
| Unrealized foreign currency (gains) losses | (720) | 333 | (440) | (1,116) | |||||||||||||||||||
| Acquisition and other costs | 118 | 245 | 286 | 1,171 | |||||||||||||||||||
| Debt related costs | 95 | 93 | 197 | 192 | |||||||||||||||||||
| Stock-based compensation expense and related employer-paid payroll taxes | 17,541 | 13,865 | 33,478 | 28,393 | |||||||||||||||||||
| Restructuring costs | 3 | 1,565 | 1,390 | 2,300 | |||||||||||||||||||
| Cyber Incident costs, net | 3,748 | 10,732 | 9,464 | 20,895 | |||||||||||||||||||
| Goodwill and indefinite-lived intangible asset impairment | 621,760 | — | 621,760 | — | |||||||||||||||||||
| 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 and cash equivalents and short-term investments were $778.2 million as of June 30, 2022. Our international subsidiaries held approximately $29.0 million of cash and cash equivalents, of which 62.5% were held in Euros. We intend either to invest our foreign earnings permanently in foreign operations or to remit these earnings to our U.S. entities in a tax-free manner with the exception for immaterial state income taxes. The U.S. Tax Act imposed a mandatory transition tax on accumulated foreign earnings and eliminates U.S. federal income taxes on foreign subsidiary distribution.
Our primary source of cash for funding operations and growth has been through cash provided by operating activities. We continue to evaluate the nature and extent of the impact of the Cyber Incident to our business and financial position. Currently it is not possible to estimate the amount of loss or range of possible loss that might result from adverse judgments, settlements, penalties, or other resolution of the proceedings and investigations resulting from the Cyber Incident. Such potential payments, if great enough, could have an adverse effect on our liquidity. In addition, there continues to be uncertainty in the rapidly changing market and economic conditions related in part to the ongoing COVID-19 pandemic as well as the war in Ukraine. However, despite these uncertainties, we believe that our existing cash and cash equivalents, our cash flows from operating activities and our borrowing capacity under our credit facilities will be sufficient to fund our operations, fund required debt repayments and meet our commitments for capital expenditures for at least the next 12 months.
Although we are not currently a party to any material definitive agreement regarding potential investments in, or acquisitions of, complementary businesses, applications or technologies, we may enter into these types of arrangements, which could reduce our cash and cash equivalents, require us to seek additional equity or debt financing or repatriate cash generated by our international operations that could cause us to incur withholding taxes on any distributions. Additional funds from financing arrangements may not be available on terms favorable to us or at all.
Indebtedness
As of June 30, 2022, our total indebtedness was $1.9 billion, with up to $117.5 million of available borrowings under our revolving credit facility. See Note 7. Debt in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt.
First Lien Credit Agreement
The First Lien Credit Agreement, as amended, provides for a senior secured revolving credit facility in an aggregate principal amount of $117.5 million, or the Revolving Credit Facility, consisting of a $17.5 million U.S. dollar revolving credit facility, or the U.S. Dollar Revolver, and a $100.0 million multicurrency revolving credit facility, or the Multicurrency Revolver. The Revolving Credit Facility includes a $35.0 million sublimit for the issuance of letters of credit. The First Lien Credit Agreement also contains a term loan facility (which we refer to as the First Lien Term Loan, and together with the Revolving Credit Facility, as the First Lien Credit Facilities) in an original aggregate principal amount of $1,990.0 million.
The First Lien Credit Agreement provides us the right to request additional commitments for new incremental term loans and revolving loans, in an aggregate principal amount not to exceed (a) the greater of (i) $400.0 million and (ii) 100% of our
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consolidated EBITDA, as defined in the First Lien Credit Agreement (calculated on a pro forma basis), for the most recent four fiscal quarter period, or the First Lien Fixed Basket, plus (b) the amount of certain voluntary prepayments of the First Lien Credit Facilities, plus (c) an unlimited amount subject to pro forma compliance with a first lien net leverage ratio not to exceed 4.75 to 1.00.
The First Lien Term Loan requires equal quarterly repayments equal to 0.25% of the original principal amount.
The First Lien Term Loan has a final maturity date of February 5, 2024. As we near the maturity date, we expect to reduce our levels of gross debt and potentially refinance our outstanding debt balance.
Summary of Cash Flows
Summarized cash flow information is as follows:
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| 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) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents from continuing operations | (1,609) | (3,453) | |||||||||
| Net cash provided by discontinued operations | — | 18,347 | |||||||||
| Net increase (decrease) in cash and cash equivalents | $ | (9,676) | $ | 40,137 | |||||||
Operating Activities
Our primary source of cash from operating activities is cash collections from our customers. We expect cash inflows from operating activities to be affected by the timing of our sales. Our primary uses of cash from operating activities are for personnel-related expenditures, and other general operating expenses, as well as payments related to taxes, interest and facilities.
For the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, the increase in cash provided by operating activities was primarily due to increased cash inflows resulting from the changes in our operating assets and liabilities. The net cash inflow resulting from the changes in our operating assets and liabilities was $4.1 million for the six months ended June 30, 2022 as compared to a net cash outflow of $47.6 million for the six months ended June 30, 2021 and was primarily due to the timing of sales and cash payments and receipts. During the six months ended June 30, 2022, cash flow from operations includes $5.0 million of insurance proceeds received for costs incurred related to the Cyber Incident. During the six months ended June 30, 2021, cash flow from operations was impacted by an increase in cash payments for expenses resulting from the Cyber Incident and the Separation. Net cash provided by operating activities was reduced by $19.4 million and $35.7 million of cash paid for taxes for the six months ended June 30, 2022 and 2021, respectively.
Investing Activities
Investing cash flows consist primarily of cash used for acquisitions, purchases and maturities of investments, capital expenditures and purchases of intangible assets. Our capital expenditures primarily relate to purchases of leasehold improvements, computers, servers and equipment to support our domestic and international office locations. Purchases of intangible assets consist primarily of capitalized research and development costs.
Net cash used in investing activities increased in the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, primarily due to $55.9 million in purchases of short-term investments, along with cash used for the acquisition of Monalytic, Inc., a monitoring, analytics and professional services company, and an increase in capitalized research and development costs related to our subscription-based offerings during the period.
Financing Activities
Financing cash flows consist primarily of issuance and repayments associated with our long-term debt, the proceeds from the issuance of shares of common stock through equity incentive plans and the repurchase of unvested incentive restricted stock and common stock to satisfy withholding tax requirements related to the settlement of restricted stock units.
Net cash used in financing activities decreased slightly in the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due a reduction in repurchases of common stock and incentive restricted stock, partially offset by a decrease in proceeds from issuance of common stock under our employee stock purchase plan.
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In the six months ended June 30, 2022 and 2021, we withheld and retired shares of common stock to satisfy $7.9 million and $9.9 million, respectively, of statutory withholding tax requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees related to the settlement of restricted stock units during the period. These shares are treated as common stock repurchases in our condensed consolidated financial statements.
In each of the six months ended June 30, 2022 and 2021, we made $10.0 million of quarterly principal payments under our First Lien Credit Agreement.
Contractual Obligations and Commitments
As of June 30, 2022, there have been no material changes in our contractual obligations and commitments as of December 31, 2021 that were disclosed in our Annual Report on Form 10-K.
During the six months ended June 30, 2022, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in conformity with GAAP and require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates, and such estimates may change if the underlying conditions or assumptions change. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected, perhaps materially.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that these accounting policies requiring significant management judgment and estimates are critical to understanding our historical and future performance, as these policies relate to the more significant areas of our financial results. These critical accounting policies are:
•the valuation of goodwill, intangibles, long-lived assets and contingent consideration;
•revenue recognition;
•stock-based compensation;
•income taxes; and
•loss contingencies.
A full description of our critical accounting policies that involve significant management judgment appears in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 25, 2022. There have been no material changes to our critical accounting policies and estimates since that time.
Goodwill
Our goodwill was derived from the Take Private transaction and acquisitions where the purchase price exceeded the fair value of the net identifiable assets acquired. Goodwill is tested for impairment at least annually on October 1st or more frequently if events or circumstances indicate it is more likely than not that the fair value of our reporting unit is less than its carrying value. See Note 2. Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional discussion regarding our goodwill impairment analysis and evaluation of goodwill impairment indicators.
As of June 30, 2022, after considering all available evidence in our evaluation of goodwill impairment indicators, we determined it appropriate to perform an interim quantitative assessment of our reporting unit as of June 30, 2022, for which we engaged a third-party valuation specialist to assist.
For the interim quantitative goodwill impairment analysis performed as of June 30, 2022, we utilized a combination of both an income and market approach to determine the fair value of our reporting unit. We applied a 66.7% weighting to the income approach and a 33.3% weighting to the market approach to arrive at the total fair value used for impairment testing. We applied a greater weighting to the income approach as we believe the income approach is a better indicator of fair value by using projected cash flows of the reporting unit being valued. The income approach utilizes a discounted cash flow method which is based on the present value of projected cash flows. The discounted cash flow models reflect our assumptions regarding revenue growth rates, risk-adjusted discount rate, terminal period growth rate, economic and market trends and other expectations about
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the anticipated operating results of our reporting unit. The terminal period growth rate is selected based on economic conditions and consideration of growth rates used in the forecast period and historical performance of the reporting unit. We utilized a weighted-average cost of capital of 11.5% as our discount rate. Under the market approach, we estimate the fair value based on market multiples of revenue derived from comparable publicly traded companies with operating characteristics similar to our reporting unit. In evaluating the estimates derived by the market based approach, we make judgments in the selection of the peer group and valuation multiples used as they apply to the reporting unit. After determining the fair value of our reporting unit, we reconciled the fair value of the reporting unit to the Company's market capitalization as of June 30, 2022. As a result of the interim goodwill impairment analysis as of June 30, 2022, our reporting unit was determined to have a carrying value that exceeded its fair value and therefore, a $612.4 million non-cash goodwill impairment charge was recognized in our condensed consolidated statements of operations for the three months ended June 30, 2022. Prior to performing the goodwill impairment analysis, we performed a quantitative assessment of our indefinite-lived intangible assets as discussed below. In addition, we performed a recoverability test of our long-lived assets, by comparing the net book value of our long-lived assets or asset groups, to the future undiscounted net cash flows attributable to such assets, and determined no impairment was required.
We also performed sensitivity analyses on the key inputs and assumptions used in determining the estimated fair value of our reporting unit by utilizing changes in assumptions that reflect reasonably likely future changes in the discount rate used in the weighted-average cost of capital calculation and the terminal growth rate. Assuming all other assumptions and inputs used in the discounted cash flow analysis are held constant, a 50 basis point increase in the discount rate assumption would result in decreases in fair value of approximately $101.6 million. Comparatively, a 50 basis point decrease in the terminal period growth rate assumption would result in decreases in fair value of approximately $78.8 million.
Fair value determination of our reporting unit requires considerable judgment and is sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the quantitative goodwill impairment tests will prove to be an accurate prediction of future results. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting unit may include such items as: (i) volatility in the equity and debt markets or other macroeconomic factors, (ii) an increase in the weighted-average cost of capital due to further increases in interest rates, (iii) timing and success of new products introduced in our evolution from monitoring to observability, (iv) the ongoing impact of the Cyber Incident including a decrease in future cash flows due to lower than expected license sales or maintenance renewals, higher than expected customer attrition, higher than estimated costs to respond and adverse loss exposure from claims, fines or penalties resulting from government investigations and litigation; and (v) fluctuations in foreign currency exchange rates that may negatively impact our reported results of operations. Accordingly, if our current cash flow assumptions are not realized, we experience further sustained declines in our stock price or market capitalization, or there are further declines in the market multiplies used in our analysis, it is possible that an additional impairment charge may be recorded in the future, which could be material.
Indefinite-lived Intangible Assets
We review our indefinite-lived intangible assets for impairment annually, in the fourth quarter, or more frequently if a triggering event occurs. As of June 30, 2022, due to the factors discussed above, we performed a quantitative assessment of our indefinite-lived intangible assets utilizing a relief from royalty method. Significant estimates and assumptions included in the relief from royalty method are expectations of revenue growth rates, and selection of royalty rate and discount rate. We utilized a royalty rate of 0.7% and a discount rate of 11.5%. We determined the estimated fair value of the SolarWinds trade name, recorded in connection with the Take Private, was less than its carrying value. As a result, we recorded a $9.4 million non-cash impairment charge, which is included in general and administrative expense, in our condensed consolidated statements of operation, for the three months ended June 30, 2022.
We also performed a sensitivity analysis on the discount rate used in determining the estimated fair value of our indefinite-lived intangible assets. Assuming all other assumptions and inputs used in the analysis are held constant, a 50 basis point increase in the discount rate assumption would result in a decrease in fair value of approximately $3.2 million.
Recent Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, for a full description of recent accounting pronouncements, if any, which is incorporated herein by reference.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We had cash and cash equivalents of $722.4 million and $732.1 million at June 30, 2022 and December 31, 2021, respectively. We also had short-term investments classified as available-for-sale securities of $55.8 million at June 30, 2022. Our cash and cash equivalents consist of bank demand deposits, money market funds and investments with original maturities of three months or less. We hold cash and cash equivalents and short-term investments for working capital purposes. Our investments are made for capital preservation purposes, and we do not enter into investments for trading or speculative purposes.
We do not have material exposure to market risk with respect to our cash and cash equivalents, as these consist primarily of highly liquid investments purchased with original maturities of three months or less at June 30, 2022.
We had total indebtedness with an outstanding principal balance of $1.90 billion at June 30, 2022 and $1.91 billion at December 31, 2021. Borrowings outstanding under our credit agreement bear interest at variable rates equal to applicable margins plus specified base rates or LIBOR-based rates with a 0% floor. As of June 30, 2022 and December 31, 2021, the annual weighted-average rate on borrowings was 4.42% and 2.85%, respectively. If there was a hypothetical 100 basis point increase in interest rates, the annual impact to interest expense would be approximately $19.1 million. This hypothetical change in interest expense has been calculated based on the borrowings outstanding at December 31, 2021 and a 100 basis point per annum change in interest rate applied over a one-year period.
We do not have material exposure to fair value market risk with respect to our total long-term outstanding indebtedness which consists of $1.9 billion U.S. dollar term loans as of June 30, 2022, not subject to market pricing.
See Note 7. Debt in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt.
Foreign Currency Exchange Risk
As a global company, we face exposure to adverse movements in foreign currency exchange rates. We primarily conduct business in the following locations: the United States, Europe, Canada, South America and Australia. This exposure is the result of selling in multiple currencies, growth in our international investments, additional headcount in foreign countries and operating in countries where the functional currency is the local currency. Specifically, our results of operations and cash flows are subject to fluctuations in the following currencies: the Euro, British Pound Sterling and Australian Dollar against the United States Dollar, or USD. These exposures may change over time as business practices evolve and economic conditions change, including as a result of the impact of the COVID-19 pandemic or the war in Ukraine on the global economy, or governmental actions taken in response to the COVID-19 pandemic. Changes in foreign currency exchange rates have had and could continue to have an adverse impact on our financial results and cash flows.
Our condensed consolidated statements of operations are translated into USD at the average exchange rates in each applicable period. Our international revenue, operating expenses and significant balance sheet accounts denominated in currencies other than the USD primarily flow through our European subsidiaries, which have Euro functional currency. This results in a two-step currency exchange process wherein the currencies other than the Euro are first converted into the functional currency and then translated into USD for our consolidated financial statements. As an example, revenue for sales in Australia is translated from the Australian Dollar to the Euro and then into the USD.
Our statement of operations and balance sheet accounts are also impacted by the re-measurement of non-functional currency transactions such as intercompany loans, cash accounts held by our overseas subsidiaries, accounts receivable denominated in foreign currencies, deferred revenue and accounts payable denominated in foreign currencies.
Foreign Currency Transaction Risk
Our foreign currency exposures typically arise from selling annual and multi-year maintenance contracts and subscriptions in multiple currencies, accounts receivable, intercompany transfer pricing arrangements and other intercompany transactions. Our foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on selected assets or liabilities without exposing us to additional risk associated with transactions that could be regarded as speculative.
We utilize purchased foreign currency forward contracts to minimize our foreign exchange exposure on certain foreign balance sheet positions denominated in currencies other than the Euro. We do not enter into any derivative financial instruments for trading or speculative purposes. Our objective in managing our exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in such exchange rates on our earnings and cash flow. The notional amounts and currencies underlying our foreign currency forward contracts will fluctuate period to period as they are principally dependent on the balances of the balance sheet positions that are denominated in currencies other than the Euro held by our global entities.
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There can be no assurance that our foreign currency hedging activities will substantially offset the impact of fluctuation in currency exchange rates on our results of operations and functional positions. As of June 30, 2022 and December 31, 2021, we did not have any forward contracts outstanding and while we do not have a formal policy to settle all derivatives prior to the end of each quarter, our current practice is to do so. The effect of derivative instruments on our condensed consolidated statements of operations was insignificant for the three and six months ended June 30, 2022 and 2021.
We are exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments, but we do not expect any counterparties to fail to meet their obligations given their high credit ratings. In addition, we diversify this risk across several counterparties and actively monitor their ratings.
Foreign Currency Translation Risk
Fluctuations in foreign currencies impact the amount of total assets, liabilities, revenue, operating expenses and cash flows that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars. If there is a change in foreign currency exchange rates, the amounts of assets, liabilities, revenue, operating expenses and cash flows that we report in U.S. dollars for foreign subsidiaries that transact in international currencies may be higher or lower to what we would have reported using a constant currency rate. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions results in reduced assets, liabilities, revenue, operating expenses and cash flows for our international operations. Similarly, our assets, liabilities, revenue, operating expenses and cash flows will increase for our international operations if the U.S. dollar weakens against foreign currencies. The conversion of the foreign subsidiaries’ financial statements into U.S. dollars will also lead to remeasurement gains and losses recorded in income, or translation gains or losses that are recorded as a component of accumulated other comprehensive income (loss).
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
For a description of the lawsuits and government investigations or inquiries related to the Cyber Incident, see Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 10. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, which description is incorporated herein by reference.
In addition, from time to time, we have been and may be involved in various legal proceedings and claims arising in our ordinary course of business. Other than with respect to the Cyber Incident, neither we nor any of our subsidiaries is a party to, and none of our respective property is the subject of, any material legal proceeding. However, the outcome of legal proceedings and claims brought against us are subject to significant uncertainty. Therefore, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management’s expectations, our consolidated financial statements for a particular period could be materially adversely affected.
Item 1A. Risk Factors
With the exception of the following updated risk factor, there have been no other material changes in our risk factors from those disclosed in Part I, Item 1A, under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.
Risks Related to Cybersecurity and the Cyber Incident
Cyberattacks, including the Cyber Incident, and other security incidents have resulted, and in the future may result, in compromises or breaches of our and our customers’ systems, the insertion of malicious code, malware, ransomware or other vulnerabilities into our systems and products and in our customers’ systems, the exploitation of vulnerabilities in our and our customers’ environments, theft or misappropriation of our and our customers’ proprietary and confidential information, interference with our and our customers’ operations, exposure to legal and other liabilities, higher customer, employee and partner attrition, negative impacts to our sales, renewals and upgrades and reputational harm and other serious negative consequences, any or all of which could materially harm our business.
We are heavily dependent on our technology infrastructure to operate our business, and our customers rely on our products to help manage and secure their own IT infrastructure and environments, including their and their customers’ confidential information. Despite our implementation of security measures and controls, our systems and those of third parties upon whom we rely are vulnerable to attack from numerous threat actors, including sophisticated nation-state and nation-state-supported actors (including advanced persistent threat intrusions). Threat actors have been, and may in the future be, able to compromise our security measures or otherwise exploit vulnerabilities in our systems, including vulnerabilities that may arise from, or have been introduced through, the actions, inactions or errors of our employees or contractors or defects in the design or manufacture of our products and systems or the products and systems that we procure from third parties. In doing so, they have been, and may in the future be, able to breach or compromise our IT systems, including those which we use to design, develop, deploy and support our products, and access and misappropriate our, our current or former employees’ and our customers’ proprietary and confidential information, including our software source code, introduce malware, ransomware or vulnerabilities into our products and systems and create system disruptions or shutdowns. By virtue of the role our products play in helping to manage and secure the environments and systems of our customers, attacks on our systems and products can result in similar impacts on our customers’ systems and data.
Moreover, the number and scale of cyberattacks have continued to increase and the methods and techniques used by threat actors, including sophisticated “supply-chain” attacks such as the Cyber Incident, malware, ransomware, viruses, denial of service attacks and phishing and social engineering attacks, continue to evolve at a rapid pace. As a result, we may be unable to identify current attacks, anticipate these attacks or implement adequate security measures. We have experienced, and may in the future experience, security breaches that may remain undetected for an extended period and, therefore, have a greater impact on our systems, our products, the proprietary data contained therein, our customers and ultimately, our business. In addition, our ability to defend against and mitigate cyberattacks depends in part on prioritization decisions that we and third parties upon whom we rely make to address vulnerabilities and security defects. While we endeavor to address all identified vulnerabilities in our products, we must make determinations as to how we prioritize developing and deploying the respective fixes, and we may be unable to do so prior to an attack. Likewise, even once a vulnerability has been addressed, for certain of our products, the fix will only be effective once a customer has updated the impacted product with the latest release, and customers that do not install and run the latest supported versions of our products may remain vulnerable to attack.
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Cyberattacks, including the Cyber Incident, and other security incidents have resulted, and in the future may result, in numerous risks and adverse consequences to our business, including that (a) our prevention, mitigation and remediation efforts may not be successful or sufficient, (b) our confidential and proprietary information, including our source code, as well as information that related to current or former employees and customers may be accessed, exfiltrated, misappropriated, compromised or corrupted, (c) we incur significant financial, legal, reputational and other harms to our business, including loss of business, decreased sales, severe reputational damage adversely affecting current and prospective customer, employee or vendor relations and investor confidence, U.S. or foreign regulatory investigations and enforcement actions, litigation, indemnity obligations, damages for contractual breach, penalties for violation of applicable laws or regulations, including laws and regulations in the United States and other jurisdictions relating to the collection, use and security of user and other personally identifiable information and data, significant costs for remediation, impairment of our ability to protect our intellectual property, stock price volatility and other significant liabilities, (d) our insurance coverage, including coverage relating to certain security and privacy damages and claim expenses, may not be available or sufficient to compensate for all liabilities we incur related to these matters or that we may face increased costs to obtain and maintain insurance in the future and (e) our steps to secure our internal environment, adapt and enhance our software development and build environments and ensure the security and integrity of the products that we deliver to customers may not be successful or sufficient to protect against future threat actors or cyberattacks. For example, during the second quarter of 2022, we identified that one of our employees was the victim of a phishing scheme that enabled a third party to introduce several fraudulent invoices, which were immaterial in amount but paid by us prior to our detection and remediation of the incident. We have incurred and expect to continue to incur significant expenses related to our cybersecurity initiatives.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
| Period | Number of Shares Purchased (1) | 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) | |||||||||||||||||||
| April 1-30, 2022 | — | $ | — | — | $ | — | |||||||||||||||||
| May 1-31, 2022 | — | — | — | — | |||||||||||||||||||
| June 1-30, 2022 | 6,750 | 4.00 | — | — | |||||||||||||||||||
| Total | 6,750 | — | |||||||||||||||||||||
________________
(1)All repurchases relate to employee held restricted stock that is subject to vesting. Unvested shares are subject to a right of repurchase by us in the event the employee stockholder ceases to be employed or engaged (as applicable) by us prior to vesting. All shares in the above table were shares repurchased as a result of us exercising this right and not pursuant to a publicly announced plan or program.
46
Item 6. Exhibits
EXHIBIT INDEX
| Exhibit Number | Exhibit Title | |||||||
| Third Amended and Restated Certificate of Incorporation as currently in effect (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 10-Q (File No. 001-38711), filed with the Securities and Exchange Commission on November 27, 2018) | ||||||||
| Certificate of Amendment to the Third Amended and Restated Certificate of Incorporation of SolarWinds Corporation (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 001-38711), filed with the Securities and Exchange Commission on July 26, 2021) | ||||||||
| Amended and Restated Bylaws as currently in effect (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 10-Q (File No. 001-38711), filed with the Securities and Exchange Commission on November 27, 2018) | ||||||||
| Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||
| 101* | Interactive Data Files (formatted as Inline XBRL) | |||||||
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
| * | Filed herewith | |||||||
| ** | The certifications attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q, are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing | |||||||
47
SOLARWINDS CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SOLARWINDS CORPORATION | |||||||||||
| Dated: | August 5, 2022 | By: | /s/ J. Barton Kalsu | ||||||||
| J. Barton Kalsu | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial and Accounting Officer) | |||||||||||
48
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Sudhakar Ramakrishna, certify that:
1.I have reviewed this quarterly report on Form 10-Q of SolarWinds Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | August 5, 2022 | By: | /s/ Sudhakar Ramakrishna | ||||||||
| Sudhakar Ramakrishna | |||||||||||
| President and Chief Executive Officer (Principal Executive Officer) | |||||||||||
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, J. Barton Kalsu, certify that:
1.I have reviewed this quarterly report on Form 10-Q of SolarWinds Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | August 5, 2022 | By: | /s/ J. Barton Kalsu | ||||||||
| J. Barton Kalsu | |||||||||||
| Chief Financial Officer (Principal Financial Officer) | |||||||||||
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of SolarWinds Corporation for the quarterly period ended June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sudhakar Ramakrishna, as Principal Executive Officer of SolarWinds Corporation, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SolarWinds Corporation.
| Date: | August 5, 2022 | By: | /s/ Sudhakar Ramakrishna | ||||||||
| Sudhakar Ramakrishna | |||||||||||
| President and Chief Executive Officer (Principal Executive Officer) | |||||||||||
The foregoing certification is being furnished pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it is not to be incorporated by reference into any filing of the Company, regardless of any general incorporation language in such filing.
In connection with the Quarterly Report on Form 10-Q of SolarWinds Corporation for the quarterly period ended June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Barton Kalsu, as Principal Financial Officer of SolarWinds Corporation, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SolarWinds Corporation.
| Date: | August 5, 2022 | By: | /s/ J. Barton Kalsu | ||||||||
| J. Barton Kalsu | |||||||||||
| Chief Financial Officer (Principal Financial Officer) | |||||||||||
The foregoing certification is being furnished pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it is not to be incorporated by reference into any filing of the Company, regardless of any general incorporation language in such filing.
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