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SolarWinds Announces Fourth Quarter 2019 Results

February 4, 2020 4:05 PM

Company also announces the appointment of Easwaran Sundaram to its Board of Directors

AUSTIN, Texas--(BUSINESS WIRE)-- SolarWinds Corporation (NYSE: SWI), a leading provider of powerful and affordable IT management software, today reported results for its fourth quarter ended December 31, 2019.

On a GAAP basis, reflecting our adoption of the new standard ASC 606 effective January 1, 2019:

On a non-GAAP basis:

For a reconciliation of our GAAP to non-GAAP results including adjustments for the impact of ASC 606, please see the tables below.

“We had a solid finish to a successful 2019 delivering fourth quarter non-GAAP revenue of $249.4 million reflecting 13% year-over-year growth, which resulted in full year 2019 non-GAAP total revenue of $938.5 million,” said Kevin Thompson, SolarWinds’ President & Chief Executive Officer. “Our fourth quarter revenue performance was within the range of our outlook, led primarily by non-GAAP subscription revenue exceeding the high end of our outlook representing 28% growth year-over-year for the quarter. In 2019, we also made significant progress towards our goal of solving the full complement of IT management challenges for our customers. We expanded our footprint in IT Operations Management through the acquisition of Samanage in the second quarter and the acquisition of VividCortex late in the fourth quarter which completed our infrastructure and application management picture. We can now help technology professionals monitor and manage all the key components of hybrid IT infrastructure through what we believe is the broadest coverage of the modern IT infrastructure and application environments.”

“In addition to solid 2019 non-GAAP total revenue growth, non-GAAP recurring revenue has grown 17% on a constant currency basis and non-GAAP recurring revenue accounted for 82% of total non-GAAP revenue for 2019. We also finished the year with strong profit margins exceeding the high end of our outlook for the year with full year 2019 Adjusted EBITDA of $453.6 million or an Adjusted EBITDA margin of 48% for 2019, despite the dilutive impact of the Samanage acquisition,” added Bart Kalsu, SolarWinds' Executive Vice President and Chief Financial Officer.

Additional highlights for the fourth quarter of 2019 include:

SolarWinds also announced today that it increased its board of directors to 11 members and appointed Easwaran “Eash” Sundaram to serve on its Board of Directors, each effective February 25, 2020. Mr. Sundaram will also serve as a member of the board’s audit committee effective upon his appointment. Mr. Sundaram currently serves as the Executive Vice President, Chief Digital & Technology Officer of JetBlue Airways Corporation.

Kevin Thompson stated, “We are excited to welcome Eash to SolarWinds’ Board of Directors. Eash is a well-rounded business executive, in addition to being an experienced CIO. He has a deep understanding of today’s hybrid IT architectures and the challenges that digital transformation initiatives introduce for IT teams. His first-hand knowledge of the criticality of delivering the level of application and IT performance that a business demands will be incredibly valuable to us as we strive to deliver technology that meets our customers’ needs.”

Balance Sheet

At December 31, 2019, total cash and cash equivalents were $173.4 million and total debt was $1.9 billion.

The financial results included in this press release are preliminary and pending final review by the company and its external auditors. Financial results will not be final until SolarWinds files its annual report on Form 10-K for the period. Information about SolarWinds' use of non-GAAP financial measures is provided below under “Non-GAAP Financial Measures.”

Financial Outlook

As of February 4, 2020, SolarWinds is providing its financial outlook for the first quarter of 2020 and full year 2020. The financial information below represents forward-looking non-GAAP financial information, including an estimate of non-GAAP revenue and revenue growth on a constant currency basis, adjusted EBITDA and non-GAAP diluted earnings per share, for the first quarter of 2020 and for the full year 2020. These non-GAAP financial measures exclude, among other items mentioned below, stock-based compensation expense and related employer-paid payroll taxes, amortization and costs related to non-recurring items. We have not reconciled our estimates of these non-GAAP financial measures to their most directly comparable GAAP measure as a result of uncertainty regarding, and the potential variability of, these excluded items in future periods. Accordingly, reconciliation is not available without unreasonable effort, although it is important to note that these excluded items could be material to our results computed in accordance with GAAP in future periods. Our reported results provide reconciliations of non-GAAP financial measures to their nearest GAAP equivalents.

Financial Outlook for First Quarter of 2020

SolarWinds’ management currently expects to achieve the following results for the first quarter of 2020:

Financial Outlook for Full Year 2020

SolarWinds’ management currently expects to achieve the following results for the full year 2020:

Additional details on our outlook will be provided on the conference call.

Conference Call and Webcast

In conjunction with this announcement, SolarWinds will host a conference call today to discuss its financial results and its business at 4:00 p.m. CT (5:00 p.m. ET/2:00 p.m. PT). A live webcast of the call will be available on the SolarWinds Investor Relations website at http://investors.solarwinds.com. A live dial-in will be available domestically at (877) 823-8676 and internationally at +1 (647) 689-4178. To access the live call, please dial in 5-10 minutes before the scheduled start time. A replay of the webcast will be available on a temporary basis shortly after the event on the SolarWinds Investor Relations website.

Forward-Looking Statements

This press release contains “forward-looking” statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial outlook for the first quarter and full year 2020. These forward-looking statements are based on management's beliefs and assumptions and on information currently available to management. Forward-looking statements include all statements that are not historical facts and may be identified by terms such as “aim,” “anticipate,” “believe,” “can,” “could,” “seek,” “should,” “feel,” “expect,” “will,” “would,” “plan,” “project,” “intend,” “estimate,” “continue,” or similar expressions and the negatives of those terms. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially 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: (a) 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; (b) the inability to sell products to new customers or to sell additional products or upgrades to our existing customers; (c) any decline in our renewal or net retention rates; (d) our inability to successfully identify, complete, and integrate acquisitions and manage our growth effectively; (e) risks associated with our international operations; (f) our status as a controlled company; (g) the possibility that general economic conditions or uncertainty cause information technology spending to be reduced or purchasing decisions to be delayed; (h) the timing and success of new product introductions and product upgrades by SolarWinds or its competitors; (i) 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; (j) potential foreign exchange gains and losses related to expenses and sales denominated in currencies other than the functional currency of an associated entity; and (k) 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 period ended December 31, 2018 filed on February 25, 2019 and the Form 10-K that SolarWinds anticipates filing on or before March 2, 2020. All information provided in this release is as of the date hereof and SolarWinds undertakes no duty to update this information except as required by law.

Adoption of the New Revenue Recognition Standard

Effective January 1, 2019, we adopted FASB Accounting Standards Codification (“ASC”) No. 2014-09 “Revenue from Contracts with Customers,” or ASC 606, using the modified retrospective method. Results for reporting periods beginning after January 1, 2019 are presented in compliance with the new revenue recognition standard ASC 606. Historical financial results for reporting periods prior to 2019 are presented in conformity with amounts previously disclosed under the prior revenue recognition standard, ASC 605 “Revenue Recognition,” or ASC 605. In the interest of comparability during the transition year to ASC 606, we present our financial results for the fourth quarter in accordance with both ASC 606 and ASC 605. Unless stated otherwise, year-over-year growth rates are calculated using financial results under ASC 606 for the current period and financial results under ASC 605 for the corresponding period in the prior year.

Adoption of the New Lease Accounting Standard

Effective December 31, 2019, as we no longer qualify as an emerging growth company, we retroactively adopted the FASB ASC No. 2016-02 “Leases (Topic 842),” or ASC 842, as of January 1, 2019 using the optional transition method in which an entity can apply the new standard at the adoption date without adjusting comparative prior periods. Historical financial results for reporting periods prior to 2019 are presented in conformity with amounts previously disclosed under the prior lease accounting standard. The adoption of the new standard resulted in leases currently designated as operating leases being reported on our consolidated balance sheet at their net present value, which increased total assets and total liabilities. The standard did not have a material impact to our consolidated statement of operations or consolidated statement of cash flows for 2019.

Non-GAAP Financial Measures

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.

SolarWinds also believes that these non-GAAP financial measures are used by investors and security analysts to (a) compare and evaluate its performance from period to period and (b) compare its performance to those of its competitors. These non-GAAP measures exclude certain items that can vary substantially from company to company depending upon their financing and accounting methods, the book value of their assets, their capital structures and the method by which their assets were acquired.

There are limitations associated with the use of these non-GAAP financial 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 completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. Certain items that are excluded from these non-GAAP financial measures can have a material impact on operating and net income (loss).

As a result, these non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, the most comparable GAAP measures. SolarWinds' management and board of directors compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measure. Set forth in the tables below are the corresponding GAAP financial measures for each non-GAAP financial measure presented. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures that are set forth in the tables below.

Non-GAAP Revenue. We define non-GAAP subscription revenue, non-GAAP maintenance revenue, non-GAAP license revenue, and non-GAAP total revenue as subscription revenue, maintenance revenue, license revenue, and total revenue, respectively, excluding the impact of purchase accounting from our take private transaction in early 2016 and other acquisitions. The non-GAAP revenue growth rates we provide are calculated using non-GAAP revenue from the comparable prior period. We monitor these measures to assess our performance because we believe our revenue growth rates would be overstated without these adjustments. We believe presenting non-GAAP subscription revenue, non-GAAP maintenance revenue, non-GAAP license revenue and non-GAAP total revenue aids in the comparability between periods and in assessing our overall operating performance.

Non-GAAP Revenue on a Constant Currency Basis. We provide non-GAAP revenue on a constant currency basis to provide a framework for assessing our performance and expectations regarding future performance excluding the effect of foreign currency rate fluctuations. To present this information, current period results and future period estimated results for entities reporting in currencies other than U.S. Dollars are converted into U.S. Dollars at the average exchange rates in effect during the corresponding prior period presented. We believe that providing non-GAAP revenue on a constant currency basis facilitates the comparison of non-GAAP revenue to prior periods.

Non-GAAP Cost of Revenue and Non-GAAP Operating Income. We provide non-GAAP cost of revenue and non-GAAP operating income and related non-GAAP margins using non-GAAP revenue as discussed above 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 Sponsor related costs and restructuring charges and other. Management believes these measures are useful for the following reasons:

Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) Per Diluted Share. We believe that the use of non-GAAP net income (loss) and non-GAAP net income (loss) per diluted share is helpful to our investors to clarify and enhance their understanding of past performance and future prospects. Non-GAAP net income (loss) is calculated as net income (loss) excluding the adjustments to non-GAAP revenue, non-GAAP cost of revenue and non-GAAP operating income, losses on extinguishment of debt, certain other non-operating gains and losses and the income tax effect of the non-GAAP exclusions. We define non-GAAP net income (loss) per diluted share as non-GAAP net income (loss) divided by the non-GAAP weighted average outstanding common shares, proforma, which is calculated as if to reflect the conversion of Class A Common Stock and shares issued for accrued dividends and shares issued at our initial public offering as if each occurred at the beginning of each respective period.

Adjusted EBITDA and Adjusted EBITDA Margin. 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 and other charges, acquisition and Sponsor related costs, interest expense, net, 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 acquisition, 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.

Unlevered Free Cash Flow. Unlevered free cash flow is a measure of our liquidity used by management to evaluate cash flow from operations, after the deduction of capital expenditures and prior to the impact of our capital structure, acquisition and Sponsor related costs, restructuring costs, employer-paid payroll taxes on stock awards and other one time items, that can be used by us for strategic opportunities and strengthening our balance sheet. However, given our debt obligations, unlevered free cash flow does not represent residual cash flow available for discretionary expenses.

#SWIfinancials

About SolarWinds

SolarWinds (NYSE: SWI) is a leading provider of powerful and affordable IT infrastructure management software. Our products give organizations worldwide, regardless of type, size or IT infrastructure complexity, the power to monitor and manage the performance of their IT environments, whether on-premises, in the cloud, or in hybrid models. We continuously engage with all types of technology professionals—IT operations professionals, DevOps professionals, and managed service providers (MSPs)—to understand the challenges they face maintaining high-performing and highly available IT infrastructures. The insights we gain from engaging with them, in places like our THWACK online community, allow us to build products that solve well-understood IT management challenges in ways that technology professionals want them solved. This focus on the user and commitment to excellence in end-to-end hybrid IT performance management has established SolarWinds as a worldwide leader in network management software and MSP solutions. Learn more today at www.solarwinds.com.

The SolarWinds, SolarWinds & Design, Orion, and THWACK trademarks are the exclusive property of SolarWinds Worldwide, LLC or its affiliates, are registered with the U.S. Patent and Trademark Office, and may be registered or pending registration in other countries. All other SolarWinds trademarks, service marks, and logos may be common law marks or are registered or pending registration. All other trademarks mentioned herein are used for identification purposes only and are trademarks of (and may be registered trademarks of) their respective companies.

© 2020 SolarWinds Worldwide, LLC. All rights reserved.

SolarWinds Corporation

Consolidated Balance Sheets

(In thousands, except share and per share information)

(Unaudited)

December 31,

2019

2018

Assets

Current assets:

Cash and cash equivalents

$

173,372

$

382,620

Accounts receivable, net of allowances of $3,171 and $3,196 as of December 31, 2019 and 2018, respectively

121,930

100,528

Income tax receivable

1,117

893

Prepaid and other current assets

23,480

16,267

Total current assets

319,899

500,308

Property and equipment, net

38,945

35,864

Operating lease assets

89,825

—

Deferred taxes

4,533

6,873

Goodwill

4,058,198

3,683,961

Intangible assets, net

771,513

956,261

Other assets, net

27,829

11,382

Total assets

$

5,310,742

$

5,194,649

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

13,796

$

9,742

Accrued liabilities and other

47,035

52,055

Current operating lease liabilities

14,093

—

Accrued interest payable

248

290

Income taxes payable

15,714

15,682

Current portion of deferred revenue

312,227

270,433

Current debt obligation

19,900

19,900

Total current liabilities

423,013

368,102

Long-term liabilities:

Deferred revenue, net of current portion

31,173

25,699

Non-current deferred taxes

97,884

147,144

Non-current operating lease liabilities

93,084

—

Other long-term liabilities

122,660

133,532

Long-term debt, net of current portion

1,893,406

1,904,072

Total liabilities

2,661,220

2,578,549

Commitments and contingencies

Stockholders’ equity:

Common stock, $0.001 par value: 1,000,000,000 shares authorized and 308,290,310 and 304,942,415 shares issued and outstanding as of December 31, 2019 and 2018, respectively

308

305

Preferred stock, $0.001 par value: 50,000,000 shares authorized and no shares issued and outstanding as of December 31, 2019 and 2018, respectively

—

—

Additional paid-in capital

3,041,880

3,011,080

Accumulated other comprehensive income (loss)

(5,247

)

17,043

Accumulated deficit

(387,419

)

(412,328

)

Total stockholders’ equity

2,649,522

2,616,100

Total liabilities and stockholders’ equity

$

5,310,742

$

5,194,649

SolarWinds Corporation

Consolidated Statements of Operations

(In thousands, except per share information)

(Unaudited)

Three Months Ended December 31,

Twelve Months Ended December 31,

2019

2018

2019

2018

Revenue:

Subscription

$

87,280

$

69,587

$

320,747

$

265,591

Maintenance

115,610

105,354

446,450

402,938

Total recurring revenue

202,890

174,941

767,197

668,529

License

44,605

46,240

165,328

164,560

Total revenue

247,495

221,181

932,525

833,089

Cost of revenue:

Cost of recurring revenue

21,412

18,127

79,571

70,744

Amortization of acquired technologies

43,922

43,870

175,883

175,991

Total cost of revenue

65,334

61,997

255,454

246,735

Gross profit

182,161

159,184

677,071

586,354

Operating expenses:

Sales and marketing

70,501

61,446

264,199

227,468

Research and development

27,894

24,472

110,362

96,272

General and administrative

25,143

20,792

97,525

80,641

Amortization of acquired intangibles

17,994

16,500

69,812

66,788

Total operating expenses

141,532

123,210

541,898

471,169

Operating income

40,629

35,974

135,173

115,185

Other income (expense):

Interest expense, net

(25,094

)

(29,905

)

(108,071

)

(142,008

)

Other income (expense), net

(104

)

(20,411

)

402

(94,887

)

Total other income (expense)

(25,198

)

(50,316

)

(107,669

)

(236,895

)

Income (loss) before income taxes

15,431

(14,342

)

27,504

(121,710

)

Income tax expense (benefit)

2,208

401

8,862

(19,644

)

Net income (loss)

$

13,223

$

(14,743

)

$

18,642

$

(102,066

)

Net income available to common stockholders (1)

$

13,095

$

668,426

$

18,441

$

364,635

Net income available to common stockholders per share:

Basic earnings per share

$

0.04

$

2.63

$

0.06

$

2.60

Diluted earnings per share

$

0.04

$

2.60

$

0.06

$

2.56

Weighted-average shares used to compute net income available to common stockholders per share:

Shares used in computation of basic earnings per share

307,914

254,209

306,768

140,301

Shares used in computation of diluted earnings per share

311,922

256,711

311,168

142,541

____________

(1

)

Net income available to common stockholders is calculated as follows:

Three Months Ended December 31,

Twelve Months Ended December 31,

2019

2018

2019

2018

Net income (loss)

$

13,223

$

(14,743

)

$

18,642

$

(102,066

)

Accretion of dividends on Class A common stock

—

(14,928

)

—

(231,549

)

Gain on conversion of Class A common stock

—

711,247

—

711,247

Earnings allocated to unvested restricted stock

(128

)

(13,150

)

(201

)

(12,997

)

Net income available to common stockholders

$

13,095

$

668,426

$

18,441

$

364,635

SolarWinds Corporation

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Three Months Ended December 31,

Twelve Months Ended December 31,

2019

2018

2019

2018

Cash flows from operating activities

Net income (loss)

$

13,223

$

(14,743

)

$

18,642

$

(102,066

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization

66,557

64,459

263,244

258,362

Provision for doubtful accounts

30

507

1,524

2,498

Stock-based compensation expense

10,478

5,501

34,395

5,833

Amortization of debt issuance costs

2,319

2,403

9,234

11,675

Loss on extinguishment of debt

—

19,547

—

80,137

Deferred taxes

(9,943

)

(8,016

)

(39,635

)

(22,101

)

(Gain) loss on foreign currency exchange rates

(6

)

663

(913

)

13,410

Other non-cash expenses

477

1,992

535

3,443

Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:

Accounts receivable

(18,182

)

(4,047

)

(18,963

)

(18,010

)

Income taxes receivable

(354

)

838

(225

)

707

Prepaid and other assets

(4,851

)

(2,566

)

(11,094

)

(4,497

)

Accounts payable

3,377

3,930

3,734

(28

)

Accrued liabilities and other

5,664

31

337

9,776

Accrued interest payable

(14

)

(826

)

(42

)

(11,342

)

Income taxes payable

(663

)

5,439

(3,019

)

(10,673

)

Deferred revenue

14,949

13,216

41,248

35,507

Other long-term liabilities

—

(268

)

905

1,511

Net cash provided by operating activities

83,061

88,060

299,907

254,142

Cash flows from investing activities

Purchases of property and equipment

(6,584

)

(3,151

)

(17,190

)

(15,945

)

Purchases of intangible assets

(2,250

)

(605

)

(5,851

)

(2,687

)

Acquisitions, net of cash acquired

(112,943

)

—

(462,447

)

(60,578

)

Proceeds from sale of cost method investment and other

(1,139

)

502

3,035

11,217

Net cash used in investing activities

(122,916

)

(3,254

)

(482,453

)

(67,993

)

Cash flows from financing activities

Proceeds from our initial public offering, net of underwriting discounts

—

357,188

—

357,188

Proceeds from issuance of common stock under employee stock purchase plan and incentive restricted stock

—

—

1,080

1,723

Repurchase of common stock and incentive restricted stock

(7,045

)

(10

)

(7,427

)

(578

)

Exercise of stock options

201

3

623

16

Premium paid on debt extinguishment

—

(14,175

)

—

(36,900

)

Proceeds from credit agreement

—

—

35,000

626,950

Repayments of borrowings from credit agreement

(4,975

)

(319,975

)

(54,900

)

(1,014,900

)

Payment of debt issuance costs

—

—

—

(5,561

)

Payment for deferred offering costs

—

(1,468

)

—

(3,662

)

Net cash provided by (used in) financing activities

(11,819

)

21,563

(25,624

)

(75,724

)

Effect of exchange rate changes on cash and cash equivalents

3,986

(2,082

)

(1,078

)

(5,521

)

Net increase (decrease) in cash and cash equivalents

(47,688

)

104,287

(209,248

)

104,904

Cash and cash equivalents

Beginning of period

221,060

278,333

382,620

277,716

End of period

$

173,372

$

382,620

$

173,372

$

382,620

Supplemental disclosure of cash flow information

Cash paid for interest

$

23,071

$

28,796

$

100,549

$

142,944

Cash paid for income taxes

$

12,345

$

905

$

47,988

$

8,950

Non-cash investing and financing transactions

Conversion of redeemable convertible Class A common stock and accumulated dividends to common stock

$

—

$

3,378,419

$

—

$

3,378,419

SolarWinds Corporation

Reconciliation of Financial Results ASC 606 to ASC 605

(Unaudited)

Three Months Ended December 31, 2019

Twelve Months Ended December 31, 2019

As reported
(ASC 606)

ASC 606 impact

Without adoption of
ASC 606
(ASC 605)

As reported
(ASC 606)

ASC 606 impact

Without adoption of

ASC 606
(ASC 605)

(in thousands)

Revenue:

Subscription

$

87,280

$

(52

)

$

87,228

$

320,747

$

314

$

321,061

Maintenance

115,610

414

116,024

446,450

1,191

447,641

Total recurring revenue

202,890

362

203,252

767,197

1,505

768,702

License

44,605

(1,284

)

43,321

165,328

(3,109

)

162,219

Total revenue

$

247,495

$

(922

)

$

246,573

$

932,525

$

(1,604

)

$

930,921

Total operating expenses(1)

141,532

1,321

142,853

541,898

5,273

547,171

Net income (loss)

$

13,223

$

(2,243

)

$

10,980

$

18,642

$

(6,877

)

$

11,765

_______

(1)

Adjustment represents the impact of the capitalization and amortization of sales commissions related to ASC 606. These adjustments are recorded in the sales and marketing line item in our consolidated statements of operations.

SolarWinds Corporation

Reconciliation of GAAP to Non-GAAP Financial Measures

(Unaudited)

Three Months Ended December 31,

Twelve Months Ended December 31,

2019

2018

2019

2018

ASC 606

ASC 606 impact

ASC 605

ASC 605

ASC 606

ASC 606 impact

ASC 605

ASC 605

(in thousands, except margin data)

Revenue:

GAAP subscription revenue

$

87,280

$

(52

)

$

87,228

$

69,587

$

320,747

$

314

$

321,061

$

265,591

Impact of purchase accounting

1,896

—

1,896

50

5,930

—

5,930

1,166

Non-GAAP subscription revenue

89,176

(52

)

89,124

69,637

326,677

314

326,991

266,757

GAAP maintenance revenue

115,610

414

116,024

105,354

446,450

1,191

447,641

402,938

Impact of purchase accounting

—

—

—

377

—

—

—

2,550

Non-GAAP maintenance revenue

115,610

414

116,024

105,731

446,450

1,191

447,641

405,488

GAAP total recurring revenue

202,890

362

203,252

174,941

767,197

1,505

768,702

668,529

Impact of purchase accounting

1,896

—

1,896

427

5,930

—

5,930

3,716

Non-GAAP total recurring revenue

204,786

362

205,148

175,368

773,127

1,505

774,632

672,245

GAAP license revenue

44,605

(1,284

)

43,321

46,240

165,328

(3,109

)

162,219

164,560

Impact of purchase accounting

—

—

—

—

—

—

—

—

Non-GAAP license revenue

44,605

(1,284

)

43,321

46,240

165,328

(3,109

)

162,219

164,560

Total GAAP revenue

$

247,495

$

(922

)

$

246,573

$

221,181

$

932,525

$

(1,604

)

$

930,921

$

833,089

Impact of purchase accounting

$

1,896

$

—

$

1,896

$

427

$

5,930

$

—

$

5,930

$

3,716

Total non-GAAP revenue

$

249,391

$

(922

)

$

248,469

$

221,608

$

938,455

$

(1,604

)

$

936,851

$

836,805

GAAP cost of revenue

$

65,334

$

65,334

$

61,997

$

255,454

$

255,454

$

246,735

Stock-based compensation expense and related employer-paid payroll taxes

(573

)

(573

)

(272

)

(1,761

)

(1,761

)

(279

)

Amortization of acquired technologies

(43,922

)

(43,922

)

(43,870

)

(175,883

)

(175,883

)

(175,991

)

Acquisition and Sponsor related costs

(8

)

(8

)

(101

)

(147

)

(147

)

(336

)

Restructuring costs and other

(26

)

(26

)

—

(48

)

(48

)

—

Non-GAAP cost of revenue

$

20,805

$

20,805

$

17,754

$

77,615

$

77,615

$

70,129

GAAP gross profit

$

182,161

$

(922

)

$

181,239

$

159,184

$

677,071

$

(1,604

)

$

675,467

$

586,354

Impact of purchase accounting

1,896

—

1,896

427

5,930

—

5,930

3,716

Stock-based compensation expense and related employer-paid payroll taxes

573

—

573

272

1,761

—

1,761

279

Amortization of acquired technologies

43,922

—

43,922

43,870

175,883

—

175,883

175,991

Acquisition and Sponsor related costs

8

—

8

101

147

—

147

336

Restructuring costs and other

26

—

26

—

48

—

48

—

Non-GAAP gross profit

$

228,586

$

(922

)

$

227,664

$

203,854

$

860,840

$

(1,604

)

$

859,236

$

766,676

GAAP gross margin

73.6

%

73.5

%

72.0

%

72.6

%

72.6

%

70.4

%

Non-GAAP gross margin

91.7

%

91.6

%

92.0

%

91.7

%

91.7

%

91.6

%

GAAP sales and marketing expense

$

70,501

$

1,321

$

71,822

$

61,446

$

264,199

$

5,273

$

269,472

$

227,468

Stock-based compensation expense and related employer-paid payroll taxes

(3,685

)

—

(3,685

)

(2,061

)

(11,653

)

—

(11,653

)

(2,295

)

Acquisition and Sponsor related costs

(15

)

—

(15

)

(1,132

)

(1,679

)

—

(1,679

)

(3,250

)

Restructuring costs and other

45

—

45

(193

)

(615

)

—

(615

)

(238

)

Non-GAAP sales and marketing expense

$

66,846

$

1,321

$

68,167

$

58,060

$

250,252

$

5,273

$

255,525

$

221,685

GAAP research and development expense

$

27,894

$

27,894

$

24,472

$

110,362

$

110,362

$

96,272

Stock-based compensation expense and related employer-paid payroll taxes

(2,958

)

(2,958

)

(1,282

)

(9,259

)

(9,259

)

(1,330

)

Acquisition and Sponsor related costs

(62

)

(62

)

(547

)

(816

)

(816

)

(2,527

)

Restructuring costs and other

—

—

—

(123

)

(123

)

(201

)

Non-GAAP research and development expense

$

24,874

$

24,874

$

22,643

$

100,164

$

100,164

$

92,214

GAAP general and administrative expense

$

25,143

$

25,143

$

20,792

$

97,525

$

97,525

$

80,641

Stock-based compensation expense and related employer-paid payroll taxes

(3,907

)

(3,907

)

(1,886

)

(12,597

)

(12,597

)

(1,929

)

Acquisition and Sponsor related costs

(1,002

)

(1,002

)

(2,260

)

(5,902

)

(5,902

)

(14,288

)

Restructuring costs and other

(1,635

)

(1,635

)

(1,312

)

(4,812

)

(4,812

)

(2,560

)

Non-GAAP general and administrative expense

$

18,599

$

18,599

$

15,334

$

74,214

$

74,214

$

61,864

GAAP operating expenses

$

141,532

$

1,321

$

142,853

$

123,210

$

541,898

$

5,273

$

547,171

$

471,169

Stock-based compensation expense and related employer-paid payroll taxes

(10,550

)

—

(10,550

)

(5,229

)

(33,509

)

—

(33,509

)

(5,554

)

Amortization of acquired intangibles

(17,994

)

—

(17,994

)

(16,500

)

(69,812

)

—

(69,812

)

(66,788

)

Acquisition and Sponsor related costs

(1,079

)

—

(1,079

)

(3,939

)

(8,397

)

—

(8,397

)

(20,065

)

Restructuring costs and other

(1,590

)

—

(1,590

)

(1,505

)

(5,550

)

—

(5,550

)

(2,999

)

Non-GAAP operating expenses

$

110,319

$

1,321

$

111,640

$

96,037

$

424,630

$

5,273

$

429,903

$

375,763

GAAP operating income

$

40,629

$

(2,243

)

$

38,386

$

35,974

$

135,173

$

(6,877

)

$

128,296

$

115,185

Impact of purchase accounting

1,896

—

1,896

427

5,930

—

5,930

3,716

Stock-based compensation expense and related employer-paid payroll taxes

11,123

—

11,123

5,501

35,270

—

35,270

5,833

Amortization of acquired technologies

43,922

—

43,922

43,870

175,883

—

175,883

175,991

Amortization of acquired intangibles

17,994

—

17,994

16,500

69,812

—

69,812

66,788

Acquisition and Sponsor related costs

1,087

—

1,087

4,040

8,544

—

8,544

20,401

Restructuring costs and other

1,616

—

1,616

1,505

5,598

—

5,598

2,999

Non-GAAP operating income

$

118,267

$

(2,243

)

$

116,024

$

107,817

$

436,210

$

(6,877

)

$

429,333

$

390,913

GAAP operating margin

16.4

%

15.6

%

16.3

%

14.5

%

13.8

%

13.8

%

Non-GAAP operating margin

47.4

%

46.7

%

48.7

%

46.5

%

45.8

%

46.7

%

GAAP net income (loss)

$

13,223

$

(2,243

)

$

10,980

$

(14,743

)

$

18,642

$

(6,877

)

$

11,765

$

(102,066

)

Impact of purchase accounting

1,896

—

1,896

427

5,930

—

5,930

3,716

Stock-based compensation expense and related employer-paid payroll taxes

11,123

—

11,123

5,501

35,270

—

35,270

5,833

Amortization of acquired technologies

43,922

—

43,922

43,870

175,883

—

175,883

175,991

Amortization of acquired intangibles

17,994

—

17,994

16,500

69,812

—

69,812

66,788

Acquisition and Sponsor related costs

1,087

—

1,087

4,040

8,544

—

8,544

20,401

Restructuring costs and other

1,616

—

1,616

1,505

5,598

—

5,598

2,999

Loss on extinguishment of debt

—

—

—

19,547

—

—

—

80,137

Tax benefits associated with above adjustments

(14,849

)

—

(14,849

)

(18,966

)

(55,881

)

—

(55,881

)

(69,713

)

Non-GAAP net income

$

76,012

$

(2,243

)

$

73,769

$

57,681

$

263,798

$

(6,877

)

$

256,921

$

184,086

GAAP diluted earnings per share

$

0.04

$

0.04

$

2.60

$

0.06

$

0.04

$

2.56

Non-GAAP diluted earnings per share, pro forma

$

0.24

$

0.24

$

0.19

$

0.85

$

0.83

$

0.60

Weighted-average shares used to compute GAAP diluted earnings per share

311,922

311,922

256,711

311,168

311,168

142,541

Weighted-average shares used to compute Non-GAAP diluted earnings per share, pro forma(1)

311,922

311,922

307,414

311,168

311,168

307,013

___________

(1)

For an explanation of the pro forma calculation, please see "Reconciliation of GAAP to Non-GAAP Weighted-Average Outstanding Diluted Common Shares" below.

Reconciliation of GAAP to Non-GAAP Weighted-Average Outstanding Diluted Common Shares

(Unaudited)

Three Months Ended December 31,

Twelve Months Ended December 31,

2019

2018

2019

2018

(in thousands)

GAAP weighted-average shares used in computing diluted earnings per share available to common shareholders

311,922

256,711

311,168

142,541

Pro forma dilutive shares:

Weighted-average pro forma adjustment to reflect conversion of redeemed convertible Class A Common Stock and shares issued for accrued dividends(1)

—

44,453

—

144,198

Shares issued at offering(2)

—

6,250

—

20,274

Non-GAAP weighted-average shares used in computing diluted earnings per share, pro forma

311,922

307,414

311,168

307,013

_____________

(1)

Adjustment to give effect to the conversion of 2,661,015 shares of Class A Common Stock that were outstanding immediately prior to the closing of the initial public offering into 140,053,370 shares of common stock and the conversion of $717.4 million of accrued and unpaid dividends on the Class A Common Stock into 37,758,109 shares of common stock equal to the result of the accrued and unpaid dividends on each share of Class A Common Stock, divided by $19.00 per share, as if the shares had been issued at the beginning of the period.

(2)

Adjustment to give effect to 25.0 million shares issued in connection with the initial public offering retroactively applied as if the shares had been issued at the beginning of the period.

Reconciliation of GAAP Net Income (Loss) to Adjusted EBITDA

(Unaudited)

Three Months Ended December 31,

Twelve Months Ended December 31,

2019

2018

2019

2018


ASC 606

ASC 606 impact

ASC 605

ASC 605


ASC 606

ASC 606 impact

ASC 605

ASC 605

(in thousands)

Net income (loss)

$

13,223

$

(2,243

)

$

10,980

$

(14,743

)

$

18,642

$

(6,877

)

$

11,765

$

(102,066

)

Amortization and depreciation

66,557

—

66,557

64,459

263,244

—

263,244

258,362

Income tax expense (benefit)

2,208

—

2,208

401

8,862

—

8,862

(19,644

)

Interest expense, net

25,094

—

25,094

29,905

108,071

—

108,071

142,008

Impact of purchase accounting on total revenue

1,896

—

1,896

427

5,930

—

5,930

3,716

Unrealized foreign currency (gains) losses(1)

(6

)

—

(6

)

663

(913

)

—

(913

)

14,367

Acquisition and Sponsor related costs

1,087

—

1,087

4,040

8,544

—

8,544

20,401

Debt related costs(2)

95

—

95

19,697

385

—

385

81,535

Stock-based compensation expense and related employer-paid payroll taxes

11,123

—

11,123

5,501

35,270

—

35,270

5,833

Restructuring costs and other

1,616

—

1,616

1,505

5,598

—

5,598

2,999

Adjusted EBITDA

$

122,893

$

(2,243

)

$

120,650

$

111,855

$

453,633

$

(6,877

)

$

446,756

$

407,511

Adjusted EBITDA margin

49.3

%

48.6

%

50.5

%

48.3

%

47.7

%

48.7

%

_______________

(1)

Unrealized foreign currency (gains) losses primarily relate to the remeasurement of our intercompany loans and to a lesser extent, unrealized foreign currency (gains) losses on selected assets and liabilities.

(2)

Debt related costs include fees related to our credit agreements, debt refinancing costs and the related write-off of debt issuance costs.

Reconciliation of Non-GAAP Revenue to Non-GAAP Revenue on a Constant Currency Basis

(Unaudited)

Three Months Ended December 31,

Twelve Months Ended December 31,

2019

2018

Growth Rate

2019

2018

Growth Rate

(in thousands, except percentages)

GAAP subscription revenue

$

87,280

$

69,587

25.4

%

$

320,747

$

265,591

20.8

%

Impact of purchase accounting

1,896

50

2.7

5,930

1,166

1.7

Non-GAAP subscription revenue

89,176

69,637

28.1

326,677

266,757

22.5

Estimated foreign currency impact(1)

928

—

1.3

6,997

—

2.6

Non-GAAP subscription revenue on a constant currency basis

$

90,104

$

69,637

29.4

%

$

333,674

$

266,757

25.1

%

GAAP maintenance revenue

$

115,610

$

105,354

9.7

%

$

446,450

$

402,938

10.8

%

Impact of purchase accounting

—

377

(0.4

)

—

2,550

(0.7

)

Non-GAAP maintenance revenue

115,610

105,731

9.3

446,450

405,488

10.1

Estimated foreign currency impact(1)

519

—

0.5

3,783

—

0.9

Non-GAAP maintenance revenue on a constant currency basis

$

116,129

$

105,731

9.8

%

$

450,233

$

405,488

11.0

%

GAAP total recurring revenue

$

202,890

$

174,941

16.0

%

$

767,197

$

668,529

14.8

%

Impact of purchase accounting

1,896

427

0.8

5,930

3,716

0.2

Non-GAAP total recurring revenue

204,786

175,368

16.8

773,127

672,245

15.0

Estimated foreign currency impact(1)

1,447

—

0.8

10,780

—

1.6

Non-GAAP total recurring revenue on a constant currency basis

$

206,233

$

175,368

17.6

%

$

783,907

$

672,245

16.6

%

GAAP license revenue

$

44,605

$

46,240

(3.5

)%

$

165,328

$

164,560

0.5

%

Impact of purchase accounting

—

—

—

—

—

—

Non-GAAP license revenue

44,605

46,240

(3.5

)

165,328

164,560

0.5

Estimated foreign currency impact(1)

178

—

0.4

1,555

—

0.9

Non-GAAP license revenue on a constant currency basis

$

44,783

$

46,240

(3.2

)%

$

166,883

$

164,560

1.4

%

Total GAAP revenue

$

247,495

$

221,181

11.9

%

$

932,525

$

833,089

11.9

%

Impact of purchase accounting

1,896

427

0.6

5,930

3,716

0.2

Non-GAAP total revenue

249,391

221,608

12.5

938,455

836,805

12.1

Estimated foreign currency impact(1)

1,625

—

0.7

12,335

—

1.5

Non-GAAP total revenue on a constant currency basis

$

251,016

$

221,608

13.3

%

$

950,790

$

836,805

13.6

%

________

(1)

The estimated foreign currency impact is calculated using the average foreign currency exchange rates in the comparable prior year monthly periods and applying those rates to foreign-denominated revenue in the corresponding monthly periods in the three and twelve months ended December 31, 2019.

Reconciliation of 2019 Non-GAAP Revenue to Adjusted Non-GAAP Revenue

Assuming Rates in Previously Issued Outlook

(Unaudited)

Three Months Ended

December 31, 2019

(in thousands)

Total non-GAAP revenue

$

249,391

Estimated foreign currency impact(2)

(671

)

Total adjusted non-GAAP revenue assuming foreign currency exchange rates used in previously issued outlook

$

248,720

________

(2)

Estimated foreign currency impact represents the impact of the difference between the actual foreign currency exchange rates in the period used to calculate our three months ended December 31, 2019 actual non-GAAP results and the rates assumed in our previously issued outlook dated October 30, 2019.

Reconciliation of Non-GAAP Revenue Outlook

Full Year 2020

Low

High

Low(2)

High(2)

(in millions, except year-over-year percentages)

Total non-GAAP revenue

$

1,035

$

1,055

10

%

12

%

Estimated foreign currency impact

2

2

1

1

Non-GAAP total revenue on a constant currency basis(1)

$

1,037

$

1,057

11

%

13

%

Q1 2020

Low

High

Low(2)

High(2)

(in millions, except year-over-year percentages)

Total non-GAAP revenue

$

244

$

249

13

%

15

%

Estimated foreign currency impact

1

1

1

1

Non-GAAP total revenue on a constant currency basis(1)

$

245

$

250

14

%

16

%

Full Year 2020(2)

Q1 2020(2)

Low

High

Low

High

Non-GAAP subscription revenue growth

21

%

23

%

28

%

31

%

Estimated foreign currency impact

—

—

1

1

Non-GAAP subscription revenue growth on a constant currency basis(1)

21

%

23

%

29

%

32

%

Non-GAAP license and maintenance revenue growth

5

%

7

%

5

%

8

%

Estimated foreign currency impact

—

—

1

—

Non-GAAP license and maintenance revenue growth on a constant currency basis(1)

5

%

7

%

6

%

8

%

________

(1)

Non-GAAP revenue on a constant currency basis is calculated using the average foreign currency exchange rates in the comparable prior year periods and applying those rates to the estimated foreign-denominated revenue in the corresponding periods rather than the forecasted foreign currency exchange rates for the future periods.

(2)

Revenue growth rates are calculated using non-GAAP revenue from the comparable prior period.

Reconciliation of Unlevered Free Cash Flow

Three Months Ended December 31,

Twelve Months Ended December 31,

2019

2018

2019

2018

(in thousands)

Net cash provided by operating activities

$

83,061

$

88,060

$

299,907

$

254,142

Capital expenditures(1)

(8,834

)

(3,756

)

(23,041

)

(18,632

)

Free cash flow

74,227

84,304

276,866

235,510

Cash paid for interest and other debt related items

22,885

28,477

99,264

143,071

Cash paid for acquisition and Sponsor related costs, restructuring costs, employer-paid payroll taxes on stock awards and other one time items

3,693

4,788

18,235

24,387

Unlevered free cash flow (excluding forfeited tax shield)

100,805

117,569

394,365

402,968

Forfeited tax shield related to interest payments(2)

(5,191

)

(6,479

)

(22,624

)

(32,162

)

Unlevered free cash flow

$

95,614

$

111,090

$

371,741

$

370,806

_______________

(1)

Includes purchases of property and equipment and purchases of intangible assets.

(2)

Forfeited tax shield related to interest payments assumes a statutory rate of 22.5% for the three and twelve months ended December 31, 2019 and 2018.

Investors:

Ashley Hook

Phone: 385.374.7210

[email protected]

Media:

Tiffany Nels

Phone: 512.682.9535

[email protected]

Source: SolarWinds Worldwide, LLC.

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