Log in
E-mail
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

SOLARWINDS CORPORATION

(SWI)
  Report
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
SummaryMost relevantAll NewsAnalyst Reco.Other languagesPress ReleasesOfficial PublicationsSector newsMarketScreener Strategies

SOLARWINDS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

03/01/2021 | 04:44pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes thereto included elsewhere in this report. In
addition to historical 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 sections entitled
"Special Note Regarding Forward-Looking Statements" and "Risk Factors" above for
a discussion of the uncertainties, risks and assumptions associated with these
statements.
Overview
SolarWinds is a leading provider of information technology, or 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 combine powerful, scalable, affordable, easy to
use products with a high-velocity, low-touch sales model to grow our business
while also generating significant cash flow.
We offer a broad portfolio of infrastructure location-agnostic products to
monitor and manage network, systems, desktop, application, storage, database,
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.
Cyber Incident
On December 14, 2020, we announced that we had been the victim of a cyberattack
on our Orion Software Platform and internal systems, or the "Cyber Incident."
Together with outside security professionals and other third parties, we are
conducting investigations into the Cyber Incident which are on-going.
Our investigations to date revealed that as part of this attack, malicious code,
or Sunburst, was injected into builds of our Orion Software Platform that we
released between March 2020 and June 2020. If present and activated in a
customer's IT environment, Sunburst could potentially allow an attacker to
compromise the server on which the Orion Software Platform was installed. We
have not located Sunburst in any of our more than seventy non-Orion products and
tools.
We released remediations for the versions of our Orion Software Platform known
to be affected by Sunburst and have taken and continue to take extensive efforts
to support and protect our customers. In addition, we shared our proprietary
code with industry researchers to enable them to validate a "kill-switch" that
is believed to have rendered Sunburst inert.
The Orion Software Platform is installed "on-premises" within customers' IT
environments, so we are unable to determine with specificity the number of
customers that installed an affected version or that were compromised as a
result of Sunburst. We believe the actual number of customers that could have
installed an affected version of the Orion Software Platform to be fewer than
18,000. Based on our discussions with customers and our investigations into the
nature and function of Sunburst and the tradecraft of the threat actor, we
believe the number of organizations which were exploited by the threat actors
through Sunburst to be substantially fewer than the number of customers that may
have installed an affected version of the Orion Platform.
It has been widely reported that, due to its nature, sophistication and
operational security, this "supply-chain" cyberattack was part of a broader
nation-state level cyber operation designed to target public and private sector
organizations. As of the date hereof, we have not independently attributed the
Cyber Incident to any specific threat actor.
Through our investigations into the Cyber Incident, we hope to understand it
better, apply our findings to further adapt and enhance our security measures
across our systems and our software development and build environments and share
our findings and adaptations with our customers, government officials and the
technology industry more broadly to help them better understand and protect
against these types of attacks in the future. We refer to these adaptations and
enhancements as "Secure by Design."
As described below, we have incurred and expect to incur significant costs
related to the Cyber Incident. We are also party to lawsuits and the subject of
governmental investigations related to the Cyber Incident. See Part I, Item 1A.
Risk Factors - Risks Related to the Cyber Incident and Note 16. Commitments and
Contingencies in the Notes to Consolidated Financial Statements included in Item
8 of Part II of this Annual Report on Form 10-K for more information regarding
these lawsuits and investigations.
                                       41
--------------------------------------------------------------------------------
  Table of Contents
Expenses
Through December 31, 2020, we recorded $3.5 million of pretax expenses related
to the Cyber Incident. We have included $0.1 million of these expenses in cost
of recurring revenue, $0.3 million in sales and marketing expense and
$3.2 million in general and administrative expense in our consolidated
statements of operations for the year ended December 31, 2020. 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, all of which were expensed as incurred.
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 16. Commitments and
Contingencies in the Notes to Consolidated Financial Statements included in Item
8 of Part II of this Annual Report on Form 10-K. 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 incur significant 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 will include increased expenses
associated with ongoing and any new claims, investigations and inquiries, as
well as increased expenses and capital investments related to our "Secure By
Design" initiatives, increased customer support activities and other related
matters. We expect to incur increased expenses for insurance, finance,
compliance activities, and to meet increased legal and regulatory requirements.
We are also providing, at our cost, free third-party support services to
customers related to the Cyber Incident. 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.
Insurance Coverage
We maintain $15 million of cybersecurity insurance coverage to limit our
exposure to losses such as those related to the Cyber Incident. Although our
policy contains standard exclusions, we expect that a significant portion of the
incremental expenses related to the remediation of and response to the Cyber
Incident will be covered by insurance. Insurance reimbursements will also be
treated as adjusting items, and the timing of recognizing insurance
reimbursements may differ from the timing of recognizing the associated
expenses.
Impacts of COVID-19
The impact from the rapidly changing market and economic conditions due to the
COVID-19 pandemic on our business is uncertain. We initially responded to the
COVID-19 pandemic by executing our business continuity plan and transitioning
nearly all of our workforce to a remote working environment to prioritize the
safety of our personnel. Substantially all of our workforce is currently working
remotely. Due to the nature of our business, at this time, we have seen an
impact on our financial results, including a decline in license revenue and
increase in loss provision for accounts receivable, but do not expect to
experience a significant impact on our financial results due to the COVID-19
pandemic. However, we are unable to predict with a level of precision the longer
term impact it may have on our business, results of operations and financial
condition due to numerous uncertainties, including the duration of the pandemic,
actions that may be taken by governmental authorities in response to the
pandemic, its impact to the business of our customers and their end-customers
and other factors identified in "Risk Factors" included in this Annual Report on
Form 10-K. 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.
Potential Spin-Off of MSP Business
On August 6, 2020, we announced that our board of directors has authorized
management to explore a potential spin-off of our MSP business into a newly
created and separately traded public company, and on December 9, 2020, we
announced that we confidentially submitted with the SEC a Form 10 registration
statement with respect to the potential spin-off. If completed, the standalone
entity would provide cloud-based software solutions for MSPs, enabling them to
support digital transformation and growth within SMEs. SolarWinds would retain
our Core IT Management business focused primarily on selling software and
cloud-based services to corporate IT organizations. We believe that, if
completed, the potential spin-off would allow each company to more effectively
pursue its distinct operating priorities, strategies and capital allocation
policies, while also
                                       42
--------------------------------------------------------------------------------
  Table of Contents
allowing stockholders to separately evaluate and value the companies based on
their distinct markets, strategies and performance. If we proceed with the
spin-off, it would be intended to be structured as a tax-free, pro-rata
distribution to all SolarWinds stockholders as of a record date to be determined
by the board of directors of SolarWinds. If completed, upon effectiveness of the
transaction, SolarWinds stockholders would own shares of both companies.
Completion of any spin-off would be subject to various conditions, including
final approval of our board of directors, and there can be no assurance that the
potential spin-off will be completed in the manner described above, or at all.
If we proceed with the spin-off, we currently are targeting to complete the
transaction in the second quarter of 2021.
We have incurred and expect to incur significant costs in connection with
exploring the potential spin-off transaction of our MSP business into a newly
created and separately traded public company. Spin-off exploration costs include
legal, accounting and advisory fees, implementation and integration costs,
duplicative costs for subscriptions and information technology systems, employee
and contractor costs and other incremental separation costs related to the
potential spin-off of the MSP business. The potential MSP spin-off transaction
results in operating expenses that would not otherwise have been incurred by us
in the normal course of our organic business operations. Spin-off exploration
costs incurred were $12.2 million during the year ended December 31, 2020. We
expect to incur additional spin-off exploration costs in future periods.
Financial Highlights
Our approach, which we call the "SolarWinds Model," is based on our commitment
to building a business that is focused on growth and profitability. Below are
our key financial highlights for the year ended December 31, 2020 as compared to
the year ended December 31, 2019.
Revenue
Our total revenue was $1.02 billion and $932.5 million for the years ended
December 31, 2020 and 2019, respectively. Our non-GAAP total revenue, which
excludes the impact of purchase accounting, was $1.02 billion and $938.5 million
for the years ended December 31, 2020 and 2019, respectively. Recurring revenue,
which consists of subscription and maintenance revenue, represented
approximately 86% of our total revenue for the year ended December 31, 2020
compared to 82% for the year ended December 31, 2019. We have increased our
recurring revenue as a result of the growth in our subscription sales and the
continued growth of our maintenance revenue.
Our Core IT Management products are targeted for ITOps, DevOps, and IT security
Professionals and provide hybrid IT performance management with a deep
visibility into applications, databases, IT infrastructures, and the full IT
stack, while remaining infrastructure-location agnostic. Core IT Management
product revenue was $716.8 million and $669.1 million for the years ended
December 31, 2020 and 2019, respectively.
Our MSP products enable MSPs to deploy, manage, and secure technologies for
their SME end customers, as well as and more efficiently manage their own
businesses. MSP product revenue was $302.5 million and $263.4 million for the
years ended December 31, 2020 and 2019, respectively.
We use Subscription Annual Recurring Revenue, or Subscription ARR, and Total
Annual Recurring Revenue, or Total ARR, to evaluate the results of our recurring
revenue model. Subscription ARR represents the annualized recurring value of all
active subscription contracts at the end of a reporting period. As of December
31, 2020, Subscription ARR was $435.1 million, up from $371.6 million as
of December 31, 2019. 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. As of December 31, 2020,
Total ARR was $959.7 million, up from $845.1 million as of December 31, 2019,
reflecting an increase of 13.6%.
As of December 31, 2020, we had over 320,000 customers. We have a broad and
diverse customer base that is not concentrated in any segment or vertical
industry. 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.
The SolarWinds Model allows us to both sell to a broad group of potential
customers and close large transactions with significant customers. We increased
our customer base by over 20,000 new customers in 2020 organically and through
acquisitions. While some customers may spend as little as $100 with us over a
twelve-month period, we had 1,057 customers who had spent more than $100,000
with us for the year ended December 31, 2020 as compared to 897 for the year
ended December 31, 2019.
We expect that the continued growth in the use of public and private clouds,
increased outsourcing of IT management services to MSPs and cross-selling of
subscription products into our existing customer base could result in an
increase in our
                                       43
--------------------------------------------------------------------------------
  Table of Contents
subscription revenue. We believe this increase, coupled with continued growth in
maintenance revenue, could cause our recurring revenue to increase as a
percentage of total revenue over time.
Our license revenue has declined as a percentage of total revenue primarily due
to the higher growth of our recurring revenue and represented approximately 14%
of our total revenue in 2020. We believe we have the potential to grow license
revenue over time as we continue to invest in international sales growth, new
product development and enhancements and increased productivity and efficiency
of our sales and marketing operations.
Profitability
We have grown while maintaining high levels of operating efficiency. Our net
income for the year ended December 31, 2020 was $158.5 million compared to $18.6
million for the year ended December 31, 2019. The increase in net income for the
period includes the impact of a discrete tax benefit of $138.2 million recorded
during the year ended December 31, 2020 related to an intra-group transfer of
certain of our intellectual property rights. For additional discussion about our
income taxes, see Note 15. Income Taxes in the Notes to Consolidated Financial
Statements included in Item 8 of Part II of this Annual Report on Form 10-K. Our
Adjusted EBITDA was $489.7 million and $453.6 million for the years ended
December 31, 2020 and 2019, respectively.
Cash Flow
We have built our business to generate strong cash flow over the long term. For
the years ended December 31, 2020 and 2019, cash flows from operations were
$389.1 million and $299.9 million, respectively. During those periods, our cash
flows from operations were reduced by cash payments for interest on our
long-term debt of $67.2 million and $100.5 million, respectively and cash
payments for income taxes of $54.6 million and $48.0 million, respectively.
Cyber Incident
The Cyber Incident is expected to negatively impact revenue, profitability and
cash flows in 2021 and beyond. Certain of our customers have, and others may,
defer renewals or cancel subscriptions which would have a negative impact on our
revenue. In addition, we expect to incur significant expenses associated with
the Cyber Incident in future periods, primarily related to legal proceedings and
regulatory investigations, increased expenses and capital investments associated
with our "Secure By Design" initiatives, increased customer support activities
and other related matters, and increased costs and expenses for insurance,
compliance activities, and to meet increased legal and regulatory requirements.
See Note 16. Commitments and Contingencies in the Notes to Consolidated
Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K 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 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.
Acquisitions
SentryOne
In October 2020, we acquired SQL Sentry Holdings, LLC, or SentryOne, a leading
technology provider of database performance monitoring and DataOps solutions for
approximately $145.1 million. We funded the transaction with cash on hand. The
SentryOne offering complements our existing on-premises and cloud-native
database management offerings to serve the full needs of the mid-market and
better serve larger organizations. The addition of the SentryOne products to the
SolarWinds portfolio also amplifies the depth and breadth of support SolarWinds
can offer for Microsoft and Microsoft Azure environments.
See Note 3. Acquisitions in the Notes to Consolidated Financial Statements
included in Item 8 of Part II of this Annual Report on Form 10-K for additional
discussion of our acquisition of SentryOne.
                                       44
--------------------------------------------------------------------------------
  Table of Contents
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. Subscription revenue includes sales of our MSP
products as well as our cloud infrastructure, application performance management
and IT service management, or ITSM products. We generally recognize revenue
ratably over the subscription term once the service is made available to the
customer or when we have the right to invoice for services performed. We
generally invoice subscription agreements monthly based on usage or in advance
over the subscription period on either a monthly or annual basis. 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. Our revenue from MSP products increases with the
addition of end customers served by our MSP customers, the proliferation of
devices managed by those MSPs and the expansion of products used by those MSPs
to manage end customers' IT infrastructures.
•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-premises 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.
In April 2020, we launched subscription pricing options for certain of our
network, systems and database management products that have historically been
sold as perpetual licenses. The new on-premises subscription option gives
customers additional flexibility when purchasing our products. The on-premises
subscription offerings are time-based revenue arrangements recognized at a point
in time upon delivery of the software and support is recognized ratably over the
contract period. On-premises subscription offerings are recorded in subscription
revenue in our consolidated statement of operations. We plan to continue to sell
perpetual licenses for these products and not require customers to transition to
a subscription pricing model. The subscription pricing option 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 gradual shift in the mix between
license and recurring revenue in each quarter as new customers purchase these
on-premises subscription offerings.
Cost of Revenue
•Cost of Recurring Revenue. Cost of recurring revenue consists of technical
support personnel costs, royalty fees, 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.
•Amortization of Acquired Technologies. Amortization of acquired technologies
primarily consists of amortization related to capitalized costs of technologies
acquired in connection with the take private transaction in 2016, or Take
Private, and to a lesser extent, acquired technologies from our 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. 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 December 31, 2020 was 3,340, as compared to
3,251 as of December 31, 2019. Our stock-based compensation expense has
increased due to equity awards granted to our employees and directors and
                                       45
--------------------------------------------------------------------------------
  Table of Contents
we intend to continue to grant equity awards which will result in additional
stock-based compensation expense in future periods. In addition, our stock-based
compensation expense increased during 2020 due to modifications to certain stock
awards to amend award terms and eliminate performance vesting conditions
applicable to such awards. Our travel costs declined in 2020 due to COVID-19 and
we expect this to continue for the duration of the pandemic.
•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. We expect to continue to grow our research and
development organization, particularly internationally.
•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 charges and other
acquisition and spin-off exploration costs, professional fees and other general
corporate expenses.
•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.
Other Income (Expense)
Other income (expense) primarily consists of interest expense and gains (losses)
resulting from changes in exchange rates on foreign currency denominated
accounts. We expect interest expense to decrease as we repay indebtedness.
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 7A: Quantitative and Qualitative Disclosures About Market
Risk" for additional information on how foreign currency impacts our financial
results.
Income Tax Expense
Income tax expense 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 may 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.
During the fourth quarter ended December 31, 2020, we completed an intra-group
transfer of certain of our intellectual property to our Irish subsidiary, where
our international business is headquartered, or the IP Transfer. The transaction
will change our mix of international income from a lower non-U.S. tax
jurisdiction to Ireland, which is subject to a statutory tax rate of 12.5%. We
recognized a discrete tax benefit of $138.2 million as a result of the IP
Transfer. For additional discussion about our income taxes, see Note 15. Income
Taxes in the Notes to Consolidated Financial Statements included in Item 8 of
Part II of this Annual Report on Form 10-K.
Comparison of the Years Ended December 31, 2020 and 2019
Revenue
                                                 Year Ended December 31,
                                         2020                                2019
                                              Percentage of                     Percentage of
                               Amount            Revenue          Amount           Revenue          Change

                                           (in thousands, except percentages)
Subscription               $    396,496              38.9  %    $ 320,747              34.4  %    $ 75,749
Maintenance                     478,284              46.9         446,450              47.9         31,834
Total recurring revenue         874,780              85.8         767,197              82.3        107,583
License                         144,461              14.2         165,328              17.7        (20,867)
Total revenue              $  1,019,241             100.0  %    $ 932,525             100.0  %    $ 86,716


                                       46
--------------------------------------------------------------------------------
  Table of Contents
Total revenue increased $86.7 million, or 9.3%, for the year ended December 31,
2020 compared to the year ended December 31, 2019. Revenue from North America
was approximately 65% and 66% of total revenue for the years ended December 31,
2020 and 2019, respectively. 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. Core IT Management product revenue was $716.8 million for the
year ended December 31, 2020 compared to $669.1 million for the year ended
December 31, 2019, representing an increase of 7.1%. MSP product revenue was
$302.5 million for the year ended December 31, 2020 compared to $263.4 million
for the year ended December 31, 2019, representing an increase of 14.8%.
Recurring Revenue
Subscription Revenue. Subscription revenue increased $75.7 million, or 23.6%,
for the year ended December 31, 2020 compared to the year ended December 31,
2019, primarily due to sales of additional MSP products, with additional
contribution from our acquired SolarWinds Service Desk and Database Performance
Monitor products. Our subscription revenue increased as a percentage of our
total revenue for the year ended December 31, 2020 compared to the year ended
December 31, 2019.
Our net retention rate for our subscription products was approximately 105% for
each of the trailing twelve-month periods ended December 31, 2020 and 2019 and
was driven primarily by strong customer retention and expansion in our MSP
products. We define our net retention rate for subscription products as 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 calculation for that same customer base.
Maintenance Revenue. Maintenance revenue increased $31.8 million, or 7.1%, for
the year ended December 31, 2020 compared to the year ended December 31, 2019
primarily due to a growing maintenance renewal customer base from sales of our
perpetual license products, strong maintenance renewal rates and annual
maintenance price increases.
Our maintenance renewal rate for our perpetual license products was
approximately 91% and 94%, respectively, for the trailing twelve-month periods
ended December 31, 2020 and 2019. The decrease in the maintenance renewal rate
for the trailing twelve-month period ended December 31, 2020 was primarily due a
planned downgrade on one large U.S. Federal maintenance renewal in the first
quarter of 2020 and, to a lesser extent, a decline in renewals due to the Cyber
Incident in December 2020. We expect our maintenance renewals rates may decline
or fluctuate in future periods as a result of the Cyber Incident. We define our
maintenance renewal rate as the sales of maintenance services for all existing
maintenance contracts expiring in a period, divided by the sum 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 $20.9 million, or 12.6%, primarily due to decreased
sales of our licensed products resulting from the difficult economic environment
during the year as a result of the global recession caused by COVID-19 and the
Cyber Incident in December 2020 and, to a lesser extent, an increase in the
subscription sales of our network, systems and database management products that
have historically been sold only as perpetual licenses. We expect our license
sales may decline or fluctuate in future periods as a result of the Cyber
Incident.
Cost of Revenue
                                                                     Year Ended December 31,
                                                         2020                                         2019
                                                               Percentage of                               Percentage of
                                           Amount                 Revenue                Amount               Revenue               Change

                                                                (in thousands, except percentages)
Cost of recurring revenue              $     93,255                      9.1  %       $  79,571                      8.5  %       $ 13,684
Amortization of acquired technologies       181,361                     17.8            175,883                     18.9             5,478
Total cost of revenue                  $    274,616                     26.9  %       $ 255,454                     27.4  %       $ 19,162


Total cost of revenue increased in the year ended December 31, 2020 compared to
the year ended December 31, 2019 primarily due to increases in public cloud
infrastructure and hosting fees related to our subscription products of
$6.9 million, personnel costs to support new customers and additional product
offerings of $4.1 million, which includes a $0.9 million increase in stock-based
compensation expense and depreciation and other amortization of $3.3 million.
The increase in amortization of acquired technologies is primarily related to
intangibles acquired through our acquisitions in 2019.
                                       47
--------------------------------------------------------------------------------
  Table of Contents
Operating Expenses
                                                                      Year Ended December 31,
                                                          2020                                         2019
                                                                Percentage of                               Percentage of
                                            Amount                 Revenue                Amount               Revenue               Change

                                                                 (in thousands, except percentages)
Sales and marketing                     $    298,452                     29.3  %       $ 264,199                     28.3  %       $ 34,253
Research and development                     126,216                     12.4            110,362                     11.8            15,854
General and administrative                   137,541                     13.5             97,525                     10.5            40,016
Amortization of acquired intangibles          74,973                      7.4             69,812                      7.5             5,161
Total operating expenses                $    637,182                     62.5  %       $ 541,898                     58.1  %       $ 95,284


Sales and Marketing. Sales and marketing expenses increased $34.3 million, or
13.0%, primarily due to increases in personnel costs of $30.6 million, which
includes an increase of $11.2 million in stock-based compensation expense and
increases in marketing program costs of $5.5 million. These increases were
partially offset by reductions in travel and acquisition related costs of $4.6
million. We increased our sales and marketing employee headcount and marketing
program costs to support the growth in the business and through the
acquisitions.
Research and Development. Research and development expenses increased $15.9
million, or 14.4%, primarily due to an increase in personnel costs of $17.6
million, which includes an increase in stock-based compensation expense of $6.4
million, partially offset by a reduction in travel costs of $1.4 million. We
increased our worldwide research and development employee headcount to expedite
delivery of product enhancements and new product offerings to our customers and
through acquisitions.
General and Administrative. General and administrative expenses increased $40.0
million, or 41.0%, primarily due to a $28.8 million increase in personnel costs,
which includes a $22.4 million increase in stock-based compensation expense, a
$11.3 million increase in costs related to the exploration of a potential
spin-off of our MSP business, a $3.2 million increase in costs related to the
Cyber Incident and a $1.1 million increase in our provision for losses on
accounts receivables. These increases were partially offset by decreases in
restructuring costs of $2.7 million and offering and travel costs of $1.9
million. The increase in stock-based compensation expense is primarily related
to modifications of stock awards during the year. See Note 11. Stockholders'
Equity (Deficit) and Stock-Based Compensation in the Notes to Consolidated
Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for
further discussion of the stock award modifications. The increase in our
provision for losses on accounts receivables is primarily related to a
settlement with a distributor, from customers acquired in recent acquisitions
and customers potentially impacted by the current economic uncertainty resulting
from the COVID-19 pandemic.
Amortization of Acquired Intangibles. Amortization of acquired intangibles
increased $5.2 million, or 7.4%, for the year ended December 31, 2020 compared
to the year ended December 31, 2019 primarily due to amortization related to our
acquisitions completed in 2019 and 2020. See Note 3. Acquisitions in the Notes
to Consolidated Financial Statements in Item 8 of Part II of this Annual Report
on Form 10-K for further discussion of our acquisitions including the intangible
assets acquired.
Interest Expense, Net
                                                                           Year Ended December 31,
                                                              2020                                          2019
                                                                    Percentage of                                Percentage of
                                                 Amount                Revenue                Amount                Revenue               Change

                                                                      (in thousands, except percentages)
Interest expense, net                        $   (75,884)                    (7.4) %       $ (108,071)                   (11.6) %       $ 32,187


Interest expense, net decreased by $32.2 million, or 29.8%, in the year ended
December 31, 2020 compared to the year ended December 31, 2019. The decrease in
interest expense is primarily due to decreases in interest rates on our debt.
The weighted-average effective interest rate on our debt during the year ended
December 31, 2020 was 3.4% compared to 5.0% for the year ended December 31,
2019. See Note 9. Debt in the Notes to Consolidated Financial Statements
included in Item 8 of Part II of this Annual Report on Form 10-K for additional
information regarding our debt.
                                       48
--------------------------------------------------------------------------------
  Table of Contents
Other Income (Expense), Net
                                                                     Year Ended December 31,
                                                         2020                                          2019
                                                                Percentage of                              Percentage of
                                            Amount                 Revenue               Amount               Revenue               Change

                                                                (in

thousands, except percentages)


Total other income (expense), net      $      (1,240)                    (0.1) %       $    402                        -  %       $ (1,642)


Other income (expense), net decreased by $1.6 million in the year ended December
31, 2020 compared to the year ended December 31, 2019 primarily due to the
impact of changes in foreign currency exchange rates related to various accounts
for the period.
Income Tax Expense (Benefit)
                                                                  Year Ended December 31,
                                                      2020                                         2019
                                                            Percentage of                              Percentage of
                                         Amount                Revenue               Amount               Revenue                Change

                                                             (in thousands, except percentages)
Income before income taxes           $    30,319                      3.0  %       $ 27,504                      2.9  %       $    2,815
Income tax expense (benefit)            (128,156)                   (12.6)            8,862                      1.0            (137,018)
Effective tax rate                        (422.7) %                                    32.2  %                                    (454.9) %


Our income tax benefit for the year ended December 31, 2020 was $128.2 million
as compared to income tax expense of $8.9 million for the year ended December
31, 2019. The change in the effective tax rate for the period was primarily due
to a discrete tax benefit of $138.2 million that was recognized as a deferred
tax asset related to the IP Transfer. For additional discussion about our income
taxes, see Note 15. Income Taxes in the Notes to Consolidated Financial
Statements included in Item 8 of Part II of this Annual Report on Form 10-K.
Comparison of the Years Ended December 31, 2019 and 2018
For a comparison of our results of operations for the years ended December 31,
2019 and 2018, see Part II, Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of our annual report on Form 10-K
for the year ended December 31, 2019, filed with the SEC on February 24, 2020.
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. Investors are encouraged to review the reconciliation of each of
these non-GAAP financial measures to its most comparable GAAP financial measure
included below.
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, costs
related to the exploration of a potential spin-off of our MSP business and the
Cyber Incident and restructuring charges, as well as the related tax impacts of
these items can have a material impact on our GAAP financial results.
                                       49
--------------------------------------------------------------------------------
  Table of Contents
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
acquisitions. 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.
                                             Year Ended December 31,
                                       2020            2019           2018

                                                 (in thousands)
Revenue:

GAAP subscription revenue $ 396,496$ 320,747$ 265,591 Impact of purchase accounting

            2,540          5,930          

1,166

Non-GAAP subscription revenue 399,036 326,677 266,757 GAAP maintenance revenue

               478,284        446,450        

402,938

Impact of purchase accounting                -              -          

2,550

Non-GAAP maintenance revenue           478,284        446,450        

405,488

GAAP total recurring revenue           874,780        767,197        

668,529

Impact of purchase accounting            2,540          5,930          

3,716

Non-GAAP total recurring revenue 877,320 773,127 672,245 GAAP license revenue

                   144,461        165,328        

164,560

Impact of purchase accounting                -              -              -
Non-GAAP license revenue               144,461        165,328        164,560
Total GAAP revenue                 $ 1,019,241$ 932,525$ 833,089

Impact of purchase accounting $ 2,540$ 5,930$ 3,716 Total non-GAAP revenue

             $ 1,021,781$ 938,455$ 836,805


Non-GAAP Operating Income and Non-GAAP Operating Margin
We provide non-GAAP operating income and related non-GAAP margin 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 other costs, spin-off exploration costs,
restructuring costs and Cyber Incident costs. 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 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
the Take Private and other 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
                                       50
--------------------------------------------------------------------------------
  Table of Contents
certain other costs including expense 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.
•Spin-off Exploration Costs. We exclude certain expense items resulting from the
exploration of a potential spin-off transaction of our MSP business into a newly
created and separately traded public company. These costs include legal,
accounting and advisory fees, implementation and integration costs, duplicative
costs for subscriptions and information technology systems, employee and
contractor costs and other incremental separation costs related to the potential
spin-off of the MSP business. The potential MSP spin-off transaction results 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
non-GAAP measures that exclude these costs facilitates a more meaningful
evaluation of our operating performance and comparisons to our past operating
performance.
•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. 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 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.
                                                                           Year Ended December 31,
                                                                  2020                 2019               2018

                                                                      (in thousands, except margin data)
GAAP operating income                                       $    107,443$ 135,173$ 115,185
Impact of purchase accounting                                      2,540               5,930              3,716

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

                                                     76,174              35,270              5,833
Amortization of acquired technologies                            181,361             175,883            175,991
Amortization of acquired intangibles                              74,973              69,812             66,788
Acquisition and other costs                                        5,854               8,544             20,401
Spin-off exploration costs                                        12,227                   -                  -
Restructuring costs                                                2,368               5,598              2,999
Cyber Incident costs                                               3,485                   -                  -
Non-GAAP operating income                                   $    466,425$ 436,210$ 390,913
GAAP operating margin                                               10.5   %            14.5  %            13.8  %
Non-GAAP operating margin                                           45.6   %            46.5  %            46.7  %


                                       51
--------------------------------------------------------------------------------
  Table of Contents
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 costs, acquisition and other costs, spin-off
exploration costs, Cyber Incident costs, 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
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.
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.
                                                                                Year Ended December 31,
                                                                      2020                 2019               2018

                                                                           (in thousands, except margin data)
Net income (loss)                                                $   158,475$  18,642$ (102,066)
Amortization and depreciation                                        277,856             263,244             258,362
Income tax expense (benefit)                                        (128,156)              8,862             (19,644)
Interest expense, net                                                 75,884             108,071             142,008
Impact of purchase accounting on total revenue                         2,540               5,930               3,716
Unrealized foreign currency (gains) losses(1)                          2,645                (913)             14,367
Acquisition and other costs                                            5,854               8,544              20,401
Spin-off exploration costs                                            12,227                   -                   -
Debt related costs(2)                                                    364                 385              81,535
Stock-based compensation expense and related employer-paid
payroll taxes                                                         76,174              35,270               5,833
Restructuring costs                                                    2,368               5,598               2,999
Cyber Incident costs                                                   3,485                   -                   -
Adjusted EBITDA                                                  $   489,716$ 453,633$  407,511
Adjusted EBITDA margin                                                  47.9   %            48.3  %             48.7  %


________________
(1)Unrealized foreign currency (gains) losses primarily relate to the
remeasurement of our intercompany loans and unrealized foreign currency (gains)
losses on selected assets and liabilities. We established a foreign currency
denominated intercompany loan as part of the Take Private to provide a conduit
to utilize foreign earnings effectively. The gains (losses) associated with the
changes in exchange rates on amounts borrowed were unrealized non-cash events.
As of July 1, 2018, this foreign currency denominated intercompany loan was
designated as long-term due to a change in our investment strategy and the
enactment of the U.S. Tax Cuts and Jobs Act of 2017, or Tax Act. Therefore,
beginning on July 1, 2018, the foreign currency transaction gains and losses
resulting from remeasurement are recognized as a component of accumulated other
comprehensive income (loss). As of December 31, 2019, we determined that the
intercompany loan will not be repaid and it was reclassified as a capital
contribution.
(2)Debt related costs include fees related to our credit agreements, debt
refinancing costs and the related write-off of debt issuance costs. See Note 9.
Debt in the Notes to Consolidated Financial Statements in Item 8 of Part II of
this Annual Report on Form 10-K for additional information regarding our debt.
                                       52
--------------------------------------------------------------------------------
  Table of Contents
Liquidity and Capital Resources
Cash and cash equivalents were $370.5 million as of December 31, 2020. Our
international subsidiaries held approximately $163.4 million of cash and cash
equivalents, of which 39.6% 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 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. Given the uncertainty in the rapidly
changing market and economic conditions related to the COVID-19 pandemic, we
continue to evaluate the nature and extent of the impact to our business and
financial position. In addition, 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. 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 December 31, 2020, our total indebtedness was $1.9 billion, with up
to $125.0 million of available borrowings under our revolving credit facility.
See Note 9. Debt in the Notes to Consolidated Financial Statements included in
Item 8 of Part II of this Annual Report on Form 10-K 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 $125.0 million, or
the Revolving Credit Facility, consisting of a $25.0 millionU.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 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.
Under the U.S. Dollar Revolver, $7.5 million of commitments will mature on
February 5, 2021, and $17.5 million along with all commitments under the
Multicurrency Revolver will mature on February 5, 2022. The First Lien Term Loan
will mature on February 5, 2024.
The First Lien Term Loan requires equal quarterly repayments equal to 0.25% of
the original principal amount.
Summary of Cash Flows
Summarized cash flow information is as follows:
                                                                             Year Ended December 31,
                                                                             2020                   2019

                                                                                 (in thousands)
Net cash provided by operating activities                            $     389,094$ 299,907
Net cash used in investing activities                                     (180,127)              (482,453)
Net cash used in financing activities                                      (25,556)               (25,624)
Effect of exchange rate changes on cash and cash equivalents                13,715                 (1,078)
Net increase (decrease) in cash and cash equivalents                       197,126               (209,248)


                                       53
--------------------------------------------------------------------------------
  Table of Contents
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 2020 compared to 2019, the increase in cash provided by operating activities
was primarily due to an increase in net income adjusted for the net effect of
non-cash items including deferred taxes, depreciation and amortization and
stock-based compensation expense. The change in deferred taxes is primarily
related the deferred tax asset recognized as a result of the IP Transfer during
the year ended December 31, 2020. The net cash inflow resulting from the changes
in our operating assets and liabilities was $41.4 million for 2020 as compared
to $12.9 million in 2019 and was primarily due to the timing of sales and cash
payments and receipts. Cash flow from operations for the year ended December 31,
2020 was reduced by $54.6 million of cash paid for taxes which includes an $8.1
million cash payment related to the transition tax as a result of the Tax Act.
Investing Activities
Investing cash flows consist primarily of cash used for acquisitions, capital
expenditures and 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 decreased in 2020 compared to 2019 due to
a decrease in cash used for acquisitions. See Note 3. Acquisitions in the Notes
to Consolidated Financial Statements included in Item 8 of Part II of this
Annual Report on Form 10-K for additional information regarding our
acquisitions. Purchases of property and equipment increased in 2020 as compared
to 2019 primarily due to purchases of leasehold improvements to expand certain
office locations and servers and equipment.
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 2020 compared to
2019 primarily due to an increase in proceeds from issuance of common stock
under our employee stock purchase plan and option exercises, partially offset by
an increase in repurchases of common stock. In 2020 we withheld and retired
shares of common stock to satisfy $12.1 million 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 consolidated
financial statements. Net cash used in financing activities for 2019 includes
the proceeds and repayment of $35.0 million in borrowings under our Revolving
Credit Facility. For each period, we made quarterly principal payments of $19.9
million due under our First Lien Credit Agreement.

Contractual Obligations and Commitments
The following table summarizes our outstanding contractual obligations as of
December 31, 2020 that require us to make future cash payments:
                                                                                       Payments Due by Period
                                                                          Less than 1                                                  More than
                                                       Total                 year              1-3 years           3-5 years            5 years

                                                                                           (in thousands)
Long-term debt obligations(1)                      $ 1,930,300$     19,900$  39,800$ 1,870,600          $       -
Cash interest expense(1)                               172,781                56,472            111,191                5,118                  -
Operating leases(2)                                    157,368                23,497             46,014               40,556             47,301
Purchase obligations(3)                                143,636               108,248             35,388                    -                  -

Transition tax payable(4)                               87,034                 8,914             23,574               47,208              7,338
Total(5)                                           $ 2,491,119$    217,031$ 255,967$ 1,963,482$  54,639


________________

(1)Represents principal maturities of our Senior Secured First Lien Credit Facility in effect at December 31, 2020. The estimated cash interest expense is based upon an interest rate of 2.90%.

                                       54
--------------------------------------------------------------------------------
  Table of Contents
(2)Represents maturities of operating lease liabilities, see Note 7. Leases in
the Notes to Consolidated Financial Statements included in Item 8 of Part II of
this Annual Report on Form 10-K for additional details. As of December 31, 2020,
we had a lease agreement in which the lease did not commence prior to year-end
and therefore the lease liabilities had not been recorded in our consolidated
balance sheet. The future minimum lease payments under this lease are
approximately $29.0 million over a lease term of eleven years.
(3)Purchase obligations primarily represent outstanding purchase orders for
purchases of software license and support fees, public cloud infrastructure and
hosting fees, corporate health insurance costs, marketing activities,
accounting, legal and contractor fees and computer hardware and software costs.
(4)Represents the provisional one-time transition tax as a result of the Tax Act
which we have elected to pay over eight years. See Note 15. Income Taxes in the
Notes to Consolidated Financial Statements included in Item 8 of Part II of this
Annual Report on Form 10-K for additional details.
(5)Other long-term obligations on our balance sheet at December 31, 2020
included non-current income tax liabilities of $32.7 million, which are
primarily related to unrecognized tax benefits. We have not included this amount
in the table above because we cannot reasonably estimate the period during which
this obligation may be incurred, if at all.
Critical Accounting Policies and Estimates
Our 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. The impact
from the rapidly changing market and economic conditions due to the COVID-19
pandemic on our business, results of operations and financial condition is
uncertain. We have made estimates of the impact of COVID-19 within our financial
statements as of and for the year ended December 31, 2020 which did not result
in material adjustments. The estimates assessed included, but were not limited
to, allowances for credit losses, the carrying values of goodwill and intangible
assets and other long-lived assets, valuation allowances for tax assets and
revenue recognition. 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.
Acquisitions
The purchase price of our acquired businesses is allocated to the assets
acquired and the liabilities assumed based on their estimated fair values, with
the excess recorded as goodwill. The fair value of identifiable intangible
assets is based on significant judgments made by management. We typically engage
third-party valuation appraisal firms to assist us in determining the fair
values and useful lives of the assets acquired. The valuation estimates and
assumptions are based on historical experience and information obtained from
management, and also include, but are not limited to, future expected cash flows
earned from the intangible asset and discount rates applied in determining the
present value of those cash flows. Unanticipated events and circumstances may
occur that could affect the accuracy or validity of such assumptions, estimates
or actual results.
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 assigned to our reporting units and tested for impairment
at least annually during the fourth quarter or sooner when circumstances
indicate an impairment may exist. An impairment of goodwill is recognized when
the carrying amount of a reporting unit exceeds its fair value. For purposes of
the annual impairment test, we assess qualitative factors to determine if it is
more likely than not that goodwill might be impaired and whether it is necessary
to perform the quantitative impairment test which considers the fair value of
the reporting unit compared with the carrying value on the date of the test.
Qualitative factors include industry and market considerations, overall
financial performance, changes in management or key personnel, changes in
strategy, changes in customers and other relevant events and circumstances
affecting the reporting unit.
In the fourth quarter, we performed a qualitative assessment for our reporting
units. As of October 1, 2020 our Core IT, Application Management, ITSM and MSP
reporting units had allocated goodwill of $2.9 billion, $65.1 million, $286.2
million
                                       55
--------------------------------------------------------------------------------
  Table of Contents
and $853.7 million, respectively. For the annual impairment analysis, we
assessed several events and circumstances that could affect the significant
inputs used to determine the fair value of our reporting units, 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, key management turnover, and earnings quality and
sustainability. As of October 1, 2020, there were no unanticipated changes or
negative indicators in the above qualitative factors that would impact the fair
value of our reporting units as of the annual impairment analysis date. As such,
we determined there were no indicators of impairment and that it was more likely
than not that the fair value of our reporting units was greater than their
carrying values and therefore performing the next step of impairment test was
unnecessary.
In December 2020, subsequent to our annual goodwill impairment analysis, we
became aware that we were the target of a cybersecurity attack that involved the
insertion of a vulnerability within our Orion Software Platform, which, if
present and activated, could potentially allow an attacker to compromise the
server on which the Orion products run. The Orion Software Platform is part of
our portfolio of products in our Core IT reporting unit. We considered the
impact of the Cyber Incident on our evaluation of goodwill impairment indicators
made during our October 1, 2020 annual test. As part of the analysis, we
considered the decline in the stock price subsequent to the Cyber Incident and
estimated impacts to new license sales, maintenance renewals and incremental
costs as a result of the Cyber Incident and determined it appropriate to perform
a quantitative assessment of our reporting units as of December 31, 2020. As of
December 31, 2020 our Core IT, Application Management, ITSM and MSP reporting
units had allocated goodwill of $3.0 billion, $61.6 million, $286.2 million and
$874.1 million, respectively. We also engaged a third-party valuation specialist
to assist in the performance of the impairment analysis of our reporting units.
For the quantitative goodwill impairment analysis, we utilized a combination of
both an income and market approach to evaluate each of our reporting units. The
income approach is based on the present value of projected cash flows and a
terminal value. The discounted cash flow models reflect our assumptions
regarding revenue growth rates, estimated implications of the Cyber Incident to
our cost structure, economic and market trends and other expectations about the
anticipated operating results of our reporting units. We discounted the
estimated cash flows for each of the reporting units using rates that represent
a market participant's weighted average cost of capital commensurate with the
reporting unit's underlying business operations and utilized discount rates of
9%, 11%, 12% and 10% for our Core IT, Application Management, ITSM and MSP
reporting units, respectively. The market approach develops an indication of
fair value by calculating average market pricing multiples of revenues and
EBITDA for selected peer publicly-traded companies. The developed multiples were
applied to applicable financial measures of the respective reporting unit to
determine an estimated fair value. 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 units being valued. After
determining the fair value of each of our reporting units, we reconciled the
aggregate fair values of the reporting units to the Company's market
capitalization as of December 31, 2020. As a result of the impairment analysis,
our Core IT and ITSM reporting units were determined to have fair values that
exceeded their carrying values by approximately 15.6% and 17.4%, respectively,
and therefore no impairment was recognized. The other reporting units' fair
values significantly exceed their carrying values.
Fair value determinations of our reporting units require considerable judgment
and are 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 Core IT and ITSM reporting
units may include such items as: (i) a decrease in future cash flows due to
lower than expected license sales or maintenance renewals and higher than
estimated costs to respond to the cybersecurity attack, (ii) higher than
expected customer attrition resulting from customer concerns related to the
cyber matter, (iii) adverse loss exposure from claims, fines or penalties from
the Cyber Incident; and (iv) volatility in the equity and debt markets or other
macroeconomic factors which could result in a higher weighted-average cost of
capital. Accordingly, if our current cash flow assumptions are not realized, it
is possible that an impairment charge may be recorded in the future.
Identifiable Intangible Assets
We evaluate long-lived assets, including finite-lived intangible assets and
other assets, for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. Events
or changes in circumstances that could result in an impairment review include,
but are not limited to, significant underperformance relative to historical or
projected future operating results, significant changes in the manner of use of
the acquired assets or the strategy for our overall business, and significant
negative industry or economic trends. If an event occurs that would cause us to
revise our estimates and assumptions used in analyzing the value of our property
and equipment or our finite-lived intangibles and other assets, that revision
could result in a non-cash impairment charge that could have a material impact
on our financial results.
                                       56
--------------------------------------------------------------------------------
  Table of Contents
Revenue Recognition
We generate revenue from fees received for subscriptions, the sale of
maintenance services associated with our perpetual license products and the sale
of perpetual license products. We recognize revenue related to contracts from
customers when we transfer promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. This is determined by following a
five-step process which includes (1) identifying the contract with a customer,
(2) identifying the performance obligations in the contract, (3) determining the
transaction price, (4) allocating the transaction price and (5) recognizing
revenue when or as we satisfy a performance obligation.
We identify performance obligations in a contract based on the goods and
services that will be transferred to the customer that are identifiable from
other promises in the contract, or distinct. If not considered distinct, the
promised goods or services are combined with other goods or services and
accounted for as a combined performance obligation. Determining the distinct
performance obligations in a contract requires judgment. Our performance
obligations primarily include perpetual and time-based licenses, maintenance
support including unspecified upgrades or enhancements to new versions of our
software products and SaaS offerings.
We allocate the transaction price of the contract to each distinct performance
obligation based on a relative standalone selling price basis. Determining
standalone selling prices for our performance obligations requires judgment and
are based on multiple factors including, but not limited to historical selling
prices and discounting practices for products and services, internal pricing
policies and pricing practices in different regions and through different sales
channels. For our subscription products and maintenance services, our standalone
selling prices are generally observable using standalone sales or renewals. For
our perpetual and time-based license products, given there are no observable
standalone sales, we estimate our standalone selling prices by evaluating our
historical pricing and discounting practices in observable bundled transactions.
We review the standalone selling price for our performance obligations
periodically and update, if needed, to ensure that the methodology utilized
reflects our current pricing practices.
Stock-Based Compensation
We have granted our employees, directors and certain contractors stock-based
incentive awards. Our stock awards vest on service-based or performance-based
vesting conditions. These awards are in the form of stock options, restricted
stock and restricted stock units. We measure stock-based compensation expense
for all share-based awards granted based on the estimated fair value of those
awards on the date of grant. The fair values of stock option awards are
estimated using a Black-Scholes valuation model. The fair value of restricted
stock unit awards and restricted stock is determined using the fair market value
of our common stock on the date of grant less any amount paid at the time of the
grant, or intrinsic value.
We use various assumptions that can be subjective in estimating the fair value
of options at the date of grant using the Black-Scholes option model including
expected dividend yield, volatility, risk-free rate of return and expected life.
In addition, we estimate the probability of the performance-based awards vesting
upon the achievement of the specified performance targets at each reporting
period. Based on the extent to which the performance targets are achieved,
shares vest at a specified percent of the target award amount. Changes in the
probability estimates associated with performance-based awards are accounted for
in the period of change using a cumulative expense adjustment to apply the new
probability estimate. In any period in which we determine the achievement of
the performance targets is not probable, we cease recording compensation expense
and all previously recognized compensation expense for the performance-based
award is reversed. Because the actual number of shares to be awarded is not
known until the end of the performance period, the actual compensation expense
related to these awards could differ from our current expectations.
Income Taxes
We use the liability method of accounting for income taxes as set forth in the
authoritative guidance for accounting for income taxes. Under this method, we
recognize deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the respective carrying amounts
and tax basis of our assets and liabilities.
In calculating our effective tax rate, we make judgments regarding certain tax
positions, including the timing and amount of deductions and allocations of
income among various tax jurisdictions.
The guidance requires us to identify, evaluate and measure all uncertain tax
positions taken or to be taken on tax returns and to record liabilities for the
amount of these positions that may not be sustained, or may only partially be
sustained, upon examination by the relevant taxing authorities. Although we
believe that our estimates and judgments are reasonable, actual results may
differ from these estimates. Some or all of these judgments are subject to
review by the taxing authorities. To the extent that the actual results of these
matters is different than the amounts recorded, such differences will affect our
effective tax rate.
                                       57

--------------------------------------------------------------------------------

  Table of Contents
We establish valuation allowances when necessary to reduce deferred tax assets
to the amounts expected to be realized. On a quarterly basis, we evaluate the
need for, and the adequacy of, valuation allowances based on the expected
realization of our deferred tax assets. The factors used to assess the
likelihood of realization include our latest forecast of future taxable income,
available tax planning strategies that could be implemented, reversal of taxable
temporary differences and carryback potential to realize the net deferred tax
assets. As of December 31, 2020, we had a valuation allowance of $14.5 million.
During the year ended December 31, 2020, we completed an intra-group transfer of
certain of our intellectual property rights to our Irish subsidiary which
resulted in the recognition of a deferred tax asset and related tax benefit of
$138.2 million based on the current fair value of the intellectual property
transferred. We applied significant judgment when determining the fair value of
the intellectual property, which serves as the tax basis of the deferred tax
asset, and in evaluating the associated tax laws in the applicable
jurisdictions. The fair value of the intellectual property is based on the
present value of projected cash flows related to the intellectual property,
which reflects management's assumptions regarding projected revenues, operating
expenses and discount rate. The deferred tax asset and the tax benefit were
measured based on the Irish tax rate expected to apply in the years the asset
will be recovered. We expect to realize the deferred tax asset resulting from
the transfer of the intellectual property rights and will assess the
realizability of the deferred tax asset quarterly. Unanticipated events and
circumstances may occur that could affect either the accuracy or validity of
such assumptions, estimates or actual results. The sustainability of our future
tax benefits is dependent upon the acceptance of the valuation estimates and
assumptions by the taxing authorities.
Loss Contingencies
We account for claims and contingencies in accordance with authoritative
guidance that requires we record an estimated loss from a claim or loss
contingency when information available prior to issuance of our consolidated
financial statements indicates a liability has been incurred at the date of our
consolidated financial statements and the amount of the loss can be reasonably
estimated. If we determine that it is reasonably possible but not probable that
an asset has been impaired or a liability has been incurred, we disclose the
amount or range of estimated loss if material or that the loss cannot be
reasonably estimated. Accounting for claims and contingencies requires us to use
our judgment. We consult with legal counsel on those issues related to
litigation and seek input from other experts and advisors with respect to
matters in the ordinary course of business.
We are involved in various lawsuits, claims, investigations and proceedings
related to the Cyber Incident. Litigation is inherently unpredictable. However,
we believe we have valid defenses with respect to legal matters pending against
us. Nevertheless, cash flows or results of operations could be materially
affected in any particular period by the resolution of one or more of these
contingencies. See Note 16. Commitments and Contingencies in the Notes to
Consolidated Financial Statements included in Item 8 of Part II of this Annual
Report on Form 10-K for a discussion of contingencies.
Off-Balance Sheet Arrangements
During the year ended December 31, 2020, 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.
Recent Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies in the Notes to
Consolidated Financial Statements in Item 8 of Part II of this Annual Report on
Form 10-K, for a full description of recent accounting pronouncements, which is
incorporated herein by reference.

© Edgar Online, source Glimpses

All news about SOLARWINDS CORPORATION
04/19SOLARWINDS  : President Biden Signs New Executive Order Escalating US Sanctions ..
AQ
04/19SOLARWINDS  : N-able (Formerly SolarWinds MSP) Announces Partnership With DNSFil..
BU
04/17SOLARWINDS  : Russia Russia Russia! The Biden Administration Imposes Tough Sanct..
AQ
04/17SOLARWINDS  : hacking campaign puts Microsoft in hot seat
AQ
04/17SOLARWINDS  : DOJ Takes Novel Action To Remove State-Sponsored Hacking Group's M..
AQ
04/17In Punishing Russia for SolarWinds, Biden Upends U.S. Convention on Cyber Esp..
DJ
04/15SOLARWINDS  : US expels Russian diplomats, imposes sanctions for hacking
AQ
04/15RUSSIA'S SVR SPY AGENCY CALLS U.S. H : Ifax
RE
04/15U.S. Puts Fresh Sanctions on Russia Over Hacking, Election Interference
DJ
04/15RUSSIA : UK and US expose global campaign of malign activity by Russian intellig..
AQ
More news