swi-20230331

UNITED 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 March 31, 2023


☐			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

SolarWinds Corporation

(Exact name of registrant as specified in its charter)


Delaware						81-0753267
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

7171 Southwest Parkway

Building 400

Austin, Texas 78735

(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
Common Stock, $0.001 par value	SWI	New York Stock Exchange

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.


Large accelerated filer	☑	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 May 2, 2023, 163,697,236 shares of common stock, par value $0.001 per share, were outstanding.

SOLARWINDS CORPORATION

Table of Contents


PART I - FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	5
	Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022	5
	Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2023 and 2022	6
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three month periods ended March 31, 2023 and 2022	7
	Condensed Consolidated Statements of Stockholders' Equity for the three month periods ended March 31, 2023 and 2022	8
	Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2023 and 2022	9
	Notes to the Condensed Consolidated Financial Statements	10
	1. Organization and Nature of Operations
	2. Summary of Significant Accounting Policies
	3. Investments
	4. Goodwill
	5. Fair Value Measurements
	6. Debt
	7. Loss Per Share
	8. Income Taxes
	9. Commitment and Contingencies

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures of Market Risk	32
Item 4.	Controls and Procedures	33
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 6.	Exhibits	36
	Signatures	37
	Certifications

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;

•expectations regarding the impact of the cyberattack on our Orion Software Platform and internal systems (the "Cyber Incident") on our business and reputation 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 investment in product development and our expectations about the results of those efforts and our ability to convert our customers to subscription products;

•expectations regarding our evolution from monitoring to observability;

•expectations regarding hiring additional personnel globally in the areas of sales and marketing and research and development;

•expectations regarding the impact of macroeconomic conditions, including the war in Ukraine, geopolitical tensions involving China, inflation, instability in the banking sector and financial services industry, foreign currency exchange rates and the global COVID-19 pandemic on our business and financial results;

•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; 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) numerous financial, legal, reputational and other risks to us related to the Cyber Incident, including risks that the incident or SolarWinds’ response thereto, may result in the 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, indemnity obligations, damages for contractual breach, penalties for violation of applicable laws or regulations and the incurrence of other liabilities, (2) litigation and investigation risks related to the Cyber Incident, including as a result of U.S. regulatory investigations and enforcement actions, including any proceeding that may be commenced by the Securities and Exchange Commission relating to the previously disclosed Wells Notice, and exposure to judgements, fines, settlements and other costs and liabilities related thereto, (3) risks that our insurance coverage may not be available or sufficient to compensate for all liabilities we incur related to these matters and (4) 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 perceived by existing and prospective customers as sufficient to address the harm caused by Cyber Incident;

•other risks related to cyber security, including that we may experience other security incidents or have vulnerabilities in our systems and services exploited, whether through the actions or inactions of our employees or otherwise, 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 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;

•risks related to any shifts in our revenue mix and the timing of how we recognize revenue as we transition to a subscription-first model;

•regulatory risks, including risks related to evolving regulation of artificial intelligence, machine learning and the receipt, collection, storage, processing and transfer of data;

•potential foreign exchange gains and losses related to expenses and sales denominated in currencies other than the functional currency of an associated entity;

•any of the following factors either generally or as a result of the impacts of global macroeconomic conditions, including the war in Ukraine, geopolitical tensions involving China, inflation, instability in the banking sector and financial services industry, foreign currency exchange rates and the COVID-19 pandemic 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 or to convert our existing customers to subscription products;

◦any decline in our renewal or net retention rates or any delay or loss of U.S. government sales;

◦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 any international expansion efforts; 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 product offerings and sales motion in order to support additional growth in our business;

•our ability to compete effectively in the markets we serve and the risks of increased competition as we enter new markets;

•our ability to attract, retain and motivate employees;

•risks related to the spin-off of the N-able business into a newly created and separately traded public company, including that we could incur significant liability if the separation is determined to be a taxable transaction or potential indemnification liabilities incurred in connection with the separation could materially affect our business and financial results;

•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, 2022.

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.

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.

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

SolarWinds Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share information)

(Unaudited)


	March 31,		December 31,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	129,180	$	121,738
Short-term investments	11,553		27,114
Accounts receivable, net of allowances of $1,772 and $1,173 as of March 31, 2023 and December 31, 2022, respectively	108,064		100,204
Income tax receivable	1,316		987


Prepaid and other current assets	63,906		57,350
Total current assets	314,019		307,393
Property and equipment, net	23,447		26,634
Operating lease assets	52,739		61,418
Deferred taxes	136,958		134,922
Goodwill	2,388,999		2,380,059
Intangible assets, net	228,272		243,980
Other assets, net	47,015		45,600
Total assets	$	3,191,449	$	3,200,006
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	8,848	$	14,045
Accrued liabilities and other	35,219		68,284
Current operating lease liabilities	15,013		15,005

Accrued interest payable	306		579
Income taxes payable	14,909		11,841
Current portion of deferred revenue	343,594		337,541
Current debt obligation	12,450		9,338
Total current liabilities	430,339		456,633
Long-term liabilities:
Deferred revenue, net of current portion	41,992		38,945
Non-current deferred taxes	10,488		8,582
Non-current operating lease liabilities	55,968		59,235
Other long-term liabilities	74,586		74,193
Long-term debt, net of current portion	1,192,276		1,192,765
Total liabilities	1,805,649		1,830,353
Commitments and contingencies (Note 9)

Stockholders’ equity:
Common stock, $0.001 par value: 1,000,000,000 shares authorized and 163,666,768 and 161,928,532 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	164		162
Preferred stock, $0.001 par value: 50,000,000 shares authorized and no shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	—		—
Additional paid-in capital	2,638,670		2,627,370
Accumulated other comprehensive loss	(37,648)		(48,114)
Accumulated deficit	(1,215,386)		(1,209,765)
Total stockholders’ equity	1,385,800		1,369,653
Total liabilities and stockholders’ equity	$	3,191,449	$	3,200,006

The accompanying notes are an integral part of these condensed consolidated financial statements.

SolarWinds Corporation

Condensed Consolidated Statements of Operations

(In thousands, except per share information)

(Unaudited)


	Three Months Ended March 31,
	2023		2022
Revenue:
Subscription	$	54,357	$	38,747
Maintenance	114,478		115,495
Total recurring revenue	168,835		154,242
License	17,141		22,626
Total revenue	185,976		176,868
Cost of revenue:
Cost of recurring revenue	18,394		17,831
Amortization of acquired technologies	3,436		17,227
Total cost of revenue	21,830		35,058
Gross profit	164,146		141,810
Operating expenses:
Sales and marketing	65,916		61,044
Research and development	23,791		23,422
General and administrative	25,601		32,664
Amortization of acquired intangibles	13,005		13,239

Total operating expenses

SEC Form 10-Q filed by SolarWinds Corporation