UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number: 001-38711

SolarWinds Corporation

(Exact name of registrant as specified in its charter)

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

7171 Southwest Parkway

Building 400

Austin, Texas 78735

(512) 682.9300

(Address and telephone number of principal executive offices) 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, $0.001 par value	SWI	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     þ Yes   ¨  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  þ  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes   þ  No

On November 3, 2023, 165,845,600 shares of common stock, par value $0.001 per share, were outstanding.

SOLARWINDS CORPORATION

Table of Contents

PART I - FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	6
	Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022	6
	Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2023 and 2022	7
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine month periods ended September 30, 2023 and 2022	8
	Condensed Consolidated Statements of Stockholders' Equity for the three and nine month periods ended September 30, 2023 and 2022	9
	Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2023 and 2022	11
	Notes to the Condensed Consolidated Financial Statements	12
	1. Organization and Nature of Operations
	2. Summary of Significant Accounting Policies
	3. Investments
	4. Goodwill
	5. Fair Value Measurements
	6. Debt
	7. Loss Per Share
	8. Income Taxes
	9. Commitment and Contingencies
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures of Market Risk	37
Item 4.	Controls and Procedures	38
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 6.	Exhibits	40
	Signatures	41

2

Safe Harbor Cautionary Statement

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such statements may be signified by terms such as “aim,” “anticipate,” “believe,” “continue,” “expect,” “feel,” “intend,” “estimate,” “seek,” “plan,” “may,” “can,” “could,” “should,” “will,” “would” or similar expressions and the negatives of those terms. In this report, forward-looking statements include statements regarding our financial projections, future financial performance and plans and objectives for future operations including, without limitation, the following:

•expectations regarding our financial condition and results of operations, including revenue, revenue growth, revenue mix, cost of revenue, operating expenses, operating income, non-GAAP operating income, non-GAAP operating margin, adjusted EBITDA and adjusted EBITDA margin, cash flows and effective income tax rate;

•expectations regarding the impact of the cyberattack on our Orion Software Platform and internal systems (the "Cyber Incident") on our business and reputation and the additional costs, liabilities and other adverse consequences that we may incur as a result of the Cyber Incident;

•expectations regarding the impact the government investigations and litigation resulting from the Cyber Incident, including the civil complaint filed by the Securities and Exchange Commission on October 30, 2023 against us and our Chief Information Security Officer relating to the previously disclosed Wells Notices, may have on our business;

•expectations regarding investment in product development and our expectations about the results of those efforts and our ability to convert our customers to subscription products;

•expectations regarding our evolution from monitoring to observability;

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

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

•intentions regarding our international earnings and investment of those earnings in international operations;

•expectations regarding our capital expenditures;

•expectations concerning acquisitions and opportunities resulting from our acquisitions; and

•our beliefs regarding the sufficiency of our cash and cash equivalents, cash flows from operating activities and borrowing capacity.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially and adversely different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the following:

•risks related to the Cyber Incident, including with respect to (1) numerous financial, legal, reputational and other risks to us related to the Cyber Incident, including risks that the incident, SolarWinds’ response thereto or litigation and investigations related to the Cyber Incident may result in the loss of business as a result of termination or non-renewal of agreements or reduced purchases or upgrades of our products, reputational damage adversely affecting customer, partner and vendor relationships and investor confidence, increased attrition of personnel and distraction of key and other personnel, indemnity obligations, damages for contractual breach, penalties for violation of applicable laws or regulations and the incurrence of other liabilities and risks related to the impact of any such costs and liabilities resulting from the exhaustion of our insurance coverage related to the Cyber Incident, (2) litigation and investigation risks related to the Cyber Incident, including as a result of the civil complaint filed by the Securities and Exchange Commission on October 30, 2023 against us and our Chief Information Security Officer relating to the previously disclosed Wells Notices, including that we may incur significant costs in defending ourselves and may be unsuccessful in doing so, resulting in exposure to potential penalties, judgements, fines, settlement-related costs and other costs and liabilities related thereto, and (3) the possibility that our steps to secure our internal environment, improve our product development environment and ensure the security and integrity of the software that we deliver to our customers may not be successful or sufficient to protect against future threat actors or attacks or be perceived by existing and prospective customers as sufficient to address the harm caused by Cyber Incident;

•other risks related to cyber security, including that we may experience other security incidents or have vulnerabilities in our systems and services exploited, whether through the actions or inactions of our employees, our customers or otherwise, which may result in compromises or breaches of our and our customers’ systems or, theft or misappropriation of our and our customers’ confidential, proprietary or personal information, as well as exposure to legal and other liabilities,

3

including the related risk of higher customer, employee and partner attrition and the loss of key personnel, as well as negative impacts to our sales, renewals and upgrades;

•risks related to the evolving breadth of our sales motion and challenges, investments and additional costs associated with increased selling efforts toward enterprise customers and adopting a subscription-first approach;

•risks relating to increased investments in, and the timing of, our transformation from monitoring to observability;

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

•risks related to using artificial intelligence in our business and our solutions, including risks related to evolving regulation of artificial intelligence, machine learning and the receipt, collection, storage, processing and transfer of data;

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

•any of the following factors either generally or as a result of the impacts of global macroeconomic conditions, including the wars in Israel and Ukraine, geopolitical tensions involving China, inflation, instability in the banking sector and financial services industry, foreign currency exchange rates and the effects of the COVID-19 pandemic or other public health crisis on the global economy or on our business operations and financial condition or on the business operations and financial conditions of our customers, their end-customers and our prospective customers:

◦reductions in information technology spending or delays in purchasing decisions by our customers, their end-customers and our prospective customers;

◦the inability to sell products to new customers or to sell additional products or upgrades to our existing customers or to convert our existing customers to subscription products;

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

◦the inability to generate significant volumes of high-quality sales leads from our digital marketing initiatives and convert such leads into new business at acceptable conversion rates;

◦the timing and adoption of new products, product upgrades or pricing model changes by us or our competitors;

◦changes in interest rates;

◦risks associated with our international operations and any international expansion efforts; and

◦ongoing sanctions and export controls;

•the possibility that our operating income could fluctuate and may decline as percentage of revenue as we make further expenditures to expand our product offerings and sales motion in order to support additional growth in our business;

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

•our ability to attract, retain and motivate employees;

•any violation of legal and regulatory requirements or any misconduct by our employees or partners;

•risks related to the spin-off of the N-able business into a newly created and separately traded public company, including that potential indemnification liabilities incurred in connection with the separation could materially affect our business and financial results;

•our inability to successfully identify, complete and integrate acquisitions and manage our growth effectively;

•risks associated with our status as a controlled company; and

•such other risks and uncertainties described more fully in documents filed with or furnished to the Securities and Exchange Commission, including the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 and this Quarterly Report on Form 10-Q.

Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially and adversely from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Investors and others should note that we announce material information to our investors using our investor relations website (https://investors.solarwinds.com), SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media to communicate with the public about our company, our business and other matters. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the social media channels listed on our investor relations website.

4

In this report “SolarWinds,” “Company,” “we,” “us” and “our” refer to SolarWinds Corporation and its consolidated subsidiaries.

5

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

SolarWinds Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share information)

(Unaudited)

	September 30,		December 31,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	232,231	$	121,738
Short-term investments	2,979		27,114
Accounts receivable, net of allowances of $1,210 and $1,173 as of September 30, 2023 and December 31, 2022, respectively	91,399		100,204
Income tax receivable	1,133		987
Prepaid and other current assets	33,354		57,350
Total current assets	361,096		307,393
Property and equipment, net	20,387		26,634
Operating lease assets	45,015		61,418
Deferred taxes	133,072		134,922
Goodwill	2,371,756		2,380,059
Intangible assets, net	196,517		243,980
Other assets, net	49,829		45,600
Total assets	$	3,177,672	$	3,200,006
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	8,996	$	14,045
Accrued liabilities and other	45,260		68,284
Current operating lease liabilities	14,941		15,005
Accrued interest payable	627		579
Income taxes payable	25,173		11,841
Current portion of deferred revenue	328,071		337,541
Current debt obligation	12,450		9,338
Total current liabilities	435,518		456,633
Long-term liabilities:
Deferred revenue, net of current portion	41,583		38,945
Non-current deferred taxes	7,017		8,582
Non-current operating lease liabilities	52,233		59,235
Other long-term liabilities	54,995		74,193
Long-term debt, net of current portion	1,191,378		1,192,765
Total liabilities	1,782,724		1,830,353
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock, $0.001 par value: 1,000,000,000 shares authorized and 165,818,155 and 161,928,532 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	166		162
Preferred stock, $0.001 par value: 50,000,000 shares authorized and no shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	—		—
Additional paid-in capital	2,672,036		2,627,370
Accumulated other comprehensive loss	(58,956)		(48,114)
Accumulated deficit	(1,218,298)		(1,209,765)
Total stockholders’ equity	1,394,948		1,369,653
Total liabilities and stockholders’ equity	$	3,177,672	$	3,200,006

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

6

SolarWinds Corporation

Condensed Consolidated Statements of Operations

(In thousands, except per share information)

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenue:
Subscription	$	58,764	$	42,248	$	166,510	$	117,975
Maintenance	116,415		114,381		346,949		343,848
Total recurring revenue	175,179		156,629		513,459		461,823
License	14,412		22,767		47,142		70,475
Total revenue	189,591		179,396		560,601		532,298
Cost of revenue:
Cost of recurring revenue	17,957		16,563		54,884		49,854
Amortization of acquired technologies	3,412		3,628		10,273		24,503
Total cost of revenue	21,369		20,191		65,157		74,357
Gross profit	168,222		159,205		495,444		457,941
Operating expenses:
Sales and marketing	59,675		64,813		185,429		190,472
Research and development	27,308		22,562		75,180		68,092
General and administrative	31,101		42,558		91,120		116,505
Amortization of acquired intangibles	11,613		13,045		36,712		39,387
Goodwill impairment	—		278,706		—		891,101
Total operating expenses	129,697		421,684		388,441		1,305,557
Operating income (loss)	38,525		(262,479)		107,003		(847,616)
Other income (expense):
Interest expense, net	(29,314)		(23,181)		(87,338)		(57,669)
Other income (expense), net	(121)		(2,418)		(197)		(1,861)
Total other expense	(29,435)		(25,599)		(87,535)		(59,530)
Income (loss) before income taxes	9,090		(288,078)		19,468		(907,146)
Income tax expense	12,262		4,141		28,001		11,856
Net loss	$	(3,172)	$	(292,219)	$	(8,533)	$	(919,002)
Net loss available to common stockholders	$	(3,172)	$	(292,219)	$	(8,533)	$	(919,002)
Net loss available to common stockholders per share:
Basic loss per share	$	(0.02)	$	(1.81)	$	(0.05)	$	(5.72)
Diluted loss per share	$	(0.02)	$	(1.81)	$	(0.05)	$	(5.72)
Weighted-average shares used to compute net loss available to common stockholders per share:
Shares used in computation of basic loss per share	165,275		161,111		164,089		160,545
Shares used in computation of diluted loss per share	165,275		161,111		164,089		160,545

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

7

SolarWinds Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net loss	$	(3,172)	$	(292,219)	$	(8,533)	$	(919,002)
Other comprehensive income (loss):
Foreign currency translation adjustment	(18,393)		(43,534)		(10,960)		(114,099)
Unrealized gains (losses) on investments, net of income tax expense (benefit) of $— and $(23) for the three months ended September 30, 2023 and 2022, respectively, and $31 and $(57) for the nine months ended September 30, 2023 and 2022, respectively	(2)		(62)		118		(214)
Other comprehensive loss	(18,395)		(43,596)		(10,842)		(114,313)
Comprehensive loss	$	(21,567)	$	(335,815)	$	(19,375)	$	(1,033,315)

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

8

SolarWinds Corporation

Condensed Consolidated Statements of Stockholders' Equity

(In thousands)

(Unaudited)

	Three Months Ended September 30, 2023
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at June 30, 2023	164,711	$	165	$	2,654,178	$	(40,561)	$	(1,215,126)	$	1,398,656
Foreign currency translation adjustment	—	—		—		(18,393)		—		(18,393)
Unrealized loss on investments, net of taxes	—	—		—		(2)		—		(2)
Net loss	—	—		—		—		(3,172)		(3,172)
Comprehensive loss										(21,567)
Exercise of stock options	2	—		2		—		—		2
Restricted stock units issued, net of shares withheld for taxes	886	1		(4,530)		—		—		(4,529)
Issuance of stock under employee stock purchase plan	219	—		1,666		—		—		1,666
Stock-based compensation	—	—		20,720		—		—		20,720
Balance at September 30, 2023	165,818	$	166	$	2,672,036	$	(58,956)	$	(1,218,298)	$	1,394,948

	Nine Months Ended September 30, 2023
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2022	161,929	$	162	$	2,627,370	$	(48,114)	$	(1,209,765)	$	1,369,653
Foreign currency translation adjustment	—	—		—		(10,960)		—		(10,960)
Unrealized gain on investments, net of taxes	—	—		—		118		—		118
Net loss	—	—		—		—		(8,533)		(8,533)
Comprehensive loss										(19,375)
Exercise of stock options	123	—		114		—		—		114
Restricted stock units issued, net of shares withheld for taxes	3,346	4		(14,700)		—		—		(14,696)
Issuance of stock	3	—		18		—		—		18
Issuance of stock under employee stock purchase plan	417	—		3,377		—		—		3,377
Stock-based compensation	—	—		55,857		—		—		55,857
Balance at September 30, 2023	165,818	$	166	$	2,672,036	$	(58,956)	$	(1,218,298)	$	1,394,948

	Three Months Ended September 30, 2022
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at June 30, 2022	160,871	$	161	$	2,594,192	$	(69,411)	$	(907,135)	$	1,617,807
Foreign currency translation adjustment	—	—		—		(43,534)		—		(43,534)
Unrealized loss on investments, net of taxes	—	—		—		(62)		—		(62)
Net loss	—	—		—		—		(292,219)		(292,219)
Comprehensive loss										(335,815)
Exercise of stock options	18	—		21		—		—		21
Restricted stock units issued, net of shares withheld for taxes	284	—		(1,201)		—		—		(1,201)
Issuance of stock	4	—		9		—		—		9
Issuance of stock under employee stock purchase plan	162	—		1,398		—		—		1,398
Stock-based compensation	—	—		18,246		—		—		18,246
Balance at September 30, 2022	161,339	$	161	$	2,612,665	$	(113,007)	$	(1,199,354)	$	1,300,465

9

	Nine Months Ended September 30, 2022
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2021	159,176	$	159	$	2,566,783	$	1,306	$	(280,352)	$	2,287,896
Foreign currency translation adjustment	—	—		—		(114,099)		—		(114,099)
Unrealized loss on investments, net of taxes	—	—		—		(214)		—		(214)
Net loss	—	—		—		—		(919,002)		(919,002)
Comprehensive loss										(1,033,315)
Exercise of stock options	52	—		58		—		—		58
Restricted stock units issued, net of shares withheld for taxes	1,738	2		(9,085)		—		—		(9,083)
Issuance of stock	61	—		236		—		—		236
Issuance of stock under employee stock purchase plan	312	—		3,151		—		—		3,151
Stock-based compensation	—	—		51,522		—		—		51,522
Balance at September 30, 2022	161,339	$	161	$	2,612,665	$	(113,007)	$	(1,199,354)	$	1,300,465

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

10

SolarWinds Corporation

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities
Net loss	$	(8,533)	$	(919,002)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	62,810		74,107
Goodwill and indefinite-lived intangible asset impairment	—		906,350
Provision for losses on accounts receivable	300		612
Stock-based compensation expense	55,103		50,599
Amortization of debt issuance costs	8,050		6,794
Loss on extinguishment of debt	—		1,930
Deferred taxes	(1,532)		(10,019)
Gain on foreign currency exchange rates	(614)		(898)
Lease impairment charges	11,685		—
Other non-cash expenses (benefit)	359		(220)
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable	7,908		(2,326)
Income taxes receivable	(171)		4
Prepaid and other assets	24,057		(20,319)
Accounts payable	(5,020)		2,385
Accrued liabilities and other	(25,125)		18,964
Accrued interest payable	47		108
Income taxes payable	(6,024)		(6,398)
Deferred revenue	(5,211)		4,017
Other long-term liabilities	100		38
Net cash provided by operating activities	118,189		106,726
Cash flows from investing activities
Purchases of investments	(3,948)		(67,133)
Maturities of investments	27,535		16,000
Purchases of property and equipment	(3,000)		(5,570)
Purchases of intangible assets	(10,404)		(11,099)
Acquisitions, net of cash acquired	—		(6,500)
Other investing activities	564		176
Net cash provided by (used in) investing activities	10,747		(74,126)
Cash flows from financing activities
Proceeds from issuance of common stock under employee stock purchase plan	3,377		3,151
Repurchase of common stock and incentive restricted stock	(14,696)		(9,123)
Exercise of stock options	114		58
Repayments of borrowings from credit agreement	(6,226)		(314,925)
Net cash used in financing activities	(17,431)		(320,839)
Effect of exchange rate changes on cash and cash equivalents	(1,012)		(2,216)
Net increase (decrease) in cash and cash equivalents	110,493		(290,455)
Cash and cash equivalents
Beginning of period	121,738		732,116
End of period	$	232,231	$	441,661
Supplemental disclosure of cash flow information
Cash paid for interest	$	83,308	$	54,629
Cash paid for income taxes	$	32,477	$	25,177

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

11

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization and Nature of Operations

SolarWinds Corporation, a Delaware corporation, and its subsidiaries (“Company,” “we,” “us” and “our”) is a leading provider of simple, powerful and secure observability and information technology, or IT, management software. Our solutions are designed to give organizations worldwide, regardless of type, size or complexity, the power to optimize performance of their IT environments, no matter where they are in their digital transformation journeys. Our business is focused on building products designed to enable technology professionals and leaders to securely monitor and manage the performance of their IT environments, whether they be on-premises, in the cloud or in hybrid deployments. Our approach has enabled us to serve the entire IT market and our customers include network and systems engineers, database administrators, storage administrators, DevOps, SecOps and service desk professionals. We sell our products for use in organizations across industries ranging in size from very small businesses to large enterprises.

2. Summary of Significant Accounting Policies

We prepared our interim condensed consolidated financial statements in conformity with United States of America generally accepted accounting principles ("GAAP"), and the reporting regulations of the Securities and Exchange Commission (the "SEC"). They do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements include the accounts of SolarWinds Corporation and the accounts of its wholly owned subsidiaries. We have eliminated all intercompany balances and transactions.

The interim financial information is unaudited, but reflects all normal adjustments that are, in our opinion, necessary to provide a fair statement of results for the interim periods presented. This interim information should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts and the disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The actual results that we experience may differ materially from our estimates. The accounting estimates that require our most significant, difficult and subjective judgments include:

•the valuation of goodwill, intangibles, long-lived assets and contingent consideration;

•revenue recognition;

•stock-based compensation;

•income taxes; and

•loss contingencies.

Recently Issued Accounting Pronouncements

During the nine months ended September 30, 2023, there have been no recently issued accounting pronouncements that are expected to have a material impact to our financial position, results of operations or cash flows.

Goodwill

Our goodwill was derived from the take private transaction in early 2016 ("Take Private") and acquisitions where the purchase price exceeded the fair value of the net identifiable assets acquired. Goodwill is tested for impairment at least annually during the fourth quarter or more frequently if events or circumstances indicate it is more likely than not that the fair value of our reporting unit is less than its carrying value.

During the year ended December 31, 2022, we experienced declines in our market capitalization and after considering the impact of current macroeconomic conditions on the assumptions used in determining the fair value of our reporting unit, determined it appropriate to perform interim quantitative assessments of our reporting unit as of June 30, 2022 and September 30, 2022. As a result of the interim goodwill impairment analyses, our reporting unit was determined to have a carrying value that exceeded its fair value and therefore, we recorded non-cash goodwill impairment charges of $612.4 million and $278.7 million for the three months ended June 30, 2022 and September 30, 2022, respectively.

Throughout the period since the quantitative assessment on September 30, 2022, there have been no unanticipated changes or negative indicators in the qualitative factors or valuation assumptions that would negatively impact the fair value of our

12

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

reporting unit. 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 unit was greater than its carrying value at September 30, 2023.

Fair value determination of our reporting unit requires considerable judgment and is sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the quantitative goodwill impairment tests will prove to be an accurate prediction of future results. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting unit may include such items as: (i) volatility in the equity and debt markets or other macroeconomic factors, (ii) an increase in the weighted-average cost of capital due to further increases in interest rates, (iii) timing and success of new products introduced in our evolution from monitoring to observability, (iv) the ongoing impact of the Cyber Incident including a decrease in future cash flows due to lower than expected license sales or maintenance renewals, higher than expected customer attrition, higher than estimated costs to respond and adverse loss exposure from claims, fines or penalties resulting from government investigations and litigation; and (v) fluctuations in foreign currency exchange rates that may negatively impact our reported results of operations. Accordingly, if our current cash flow assumptions are not realized, we experience further sustained declines in our stock price or market capitalization, or there are further declines in the market multiplies used in our analysis, it is possible that an additional impairment charge may be recorded in the future, which could be material.

Fair Value Measurements

We apply the authoritative guidance on fair value measurements for financial assets and liabilities that are measured at fair value on a recurring basis and non-financial assets and liabilities, such as goodwill, intangible assets and property, plant and equipment that are measured at fair value on a non-recurring basis.

The guidance establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:

Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets accessible by us.

Level 2: Inputs that are observable in the marketplace other than those inputs classified as Level 1.

Level 3: Inputs that are unobservable in the marketplace and significant to the valuation.

We determine the fair value of our available-for-sale securities based on inputs obtained from multiple pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, we classify all of our available-for-sale securities as being valued using Level 2 inputs. The valuation techniques used to determine the fair value of our financial instruments having Level 2 inputs are derived from unadjusted, non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models. Our procedures include controls to ensure that appropriate fair values are recorded by a review of the valuation methods and assumptions.

See Note 5. Fair Value Measurements for a summary of our financial instruments accounted for at fair value on a recurring basis. The carrying amounts reported in our consolidated balance sheets for cash, accounts receivable, accounts payable and other accrued expenses approximate fair value due to relatively short periods to maturity.

Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component are summarized below:

	Foreign Currency Translation Adjustments		Unrealized Gain (Loss) on Investments,  Net of Tax		Accumulated Other Comprehensive  Income (Loss)
	(in thousands)
Balance at December 31, 2022	$	(47,996)	$	(118)	$	(48,114)
Other comprehensive gain (loss) before reclassification	(10,960)		118		(10,842)
Amount reclassified from accumulated other comprehensive income (loss)	—		—		—
Net current period other comprehensive income (loss)	(10,960)		118		(10,842)
Balance at September 30, 2023	$	(58,956)	$	—	$	(58,956)

13

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Deferred Revenue

Details of our total deferred revenue balance are as follows:

	Total Deferred Revenue
	(in thousands)
Balance at December 31, 2022	$	376,486
Deferred revenue recognized	(396,026)
Additional amounts deferred	389,194
Balance at September 30, 2023	$	369,654

We expect to recognize revenue related to these remaining performance obligations as of September 30, 2023 as follows:

	Revenue Recognition Expected by Period
	Total		Less than  1 year		1-3 years		More than 3 years
	(in thousands)
Expected recognition of deferred revenue	$	369,654	$	328,071	$	40,656	$	927

Deferred Commissions

Details of our deferred commissions balance are as follows:

			Deferred Commissions
			(in thousands)
Balance at December 31, 2022			$	22,540
Commissions capitalized			6,773
Amortization recognized			(6,222)
Balance at September 30, 2023			$	23,091
	September 30,		December 31,
	2023		2022
	(in thousands)
Classified as:
Current	$	7,624	$	6,936
Non-current	15,467		15,604
Total deferred commissions	$	23,091	$	22,540

Leases

During the nine months ended September 30, 2023, as part of our ongoing efforts to align our office lease arrangements with our anticipated operating needs, we exited certain leased facilities and recognized impairment charges for the related operating lease assets of $11.7 million, which are included in general and administrative expense.

Cost of Revenue

Amortization of Acquired Technologies. Amortization of acquired technologies included in cost of revenue relate to our licensed products and subscription offerings as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)
Amortization of acquired license technologies	$	924	$	917	$	2,770	$	16,321
Amortization of acquired subscription technologies	2,488		2,711		7,503		8,182
Total amortization of acquired technologies	$	3,412	$	3,628	$	10,273	$	24,503

14

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

The decrease in amortization of acquired license technologies for the nine months ended September 30, 2023 in comparison to the same period in 2022 was primarily due to certain intangible assets acquired in connection with the Take Private being fully amortized.

3. Investments

Our short-term investments as of September 30, 2023 and December 31, 2022 consist of available-for-sale securities, such as U.S. Treasury securities, corporate bonds, commercial paper and asset-backed securities.

The following table summarizes our short-term investments:

	September 30, 2023
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Short-term investments:
Available-for-sale securities:
U.S. Treasury securities	$	2,979	$	—	$	—	$	2,979
Total short-term investments	$	2,979	$	—	$	—	$	2,979
	December 31, 2022
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Short-term investments:
Available-for-sale securities:
U.S. Treasury securities	$	6,013	$	—	$	(43)	$	5,970
Corporate bonds	19,887		—		(105)		19,782
Commercial paper	798		—		—		798
Asset-backed securities	565		—		(1)		564
Total short-term investments	$	27,263	$	—	$	(149)	$	27,114

The following table summarizes the fair value of our available-for-sale securities with unrealized losses aggregated by type of investment instrument and length of time those securities have been in a continuous unrealized loss position:

	December 31, 2022
	Less Than 12 Months				12 Months or Greater				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in thousands)
As of December 31, 2022
U.S. Treasury securities	$	5,970	$	(43)	$	—	$	—	$	5,970	$	(43)
Corporate bonds	19,782		(105)		—		—		19,782		(105)
Asset-backed securities	564		(1)		—		—		564		(1)
	$	26,316	$	(149)	$	—	$	—	$	26,316	$	(149)

The following table summarizes the contractual underlying maturities of our available-for-sale securities:

	September 30, 2023
	Cost		Fair Value
	(in thousands)
Due in one year or less	$	2,979	$	2,979

15

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

4. Goodwill

The following table reflects the changes in goodwill for the nine months ended September 30, 2023:

	(in thousands)
Balance at December 31, 2022	$	2,380,059
Foreign currency translation	(8,303)
Balance at September 30, 2023	$	2,371,756

As of September 30, 2023, the accumulated goodwill impairment on our condensed consolidated balance sheet was $891.1 million.

5. Fair Value Measurements

The following table summarizes the fair value of our financial assets that were measured on a recurring basis as of September 30, 2023 and December 31, 2022. There have been no transfers between fair value measurement levels during the nine months ended September 30, 2023.

	Fair Value Measurements at September 30, 2023 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(in thousands)
Cash equivalents:
Money market funds	$	178,821	$	—	$	—	$	178,821
U.S. Treasury securities	—		1,990		—		1,990
Commercial paper	—		17,129		—		17,129
Total cash equivalents	178,821		19,119		—		197,940
Short-term investments:
U.S. Treasury securities	—		2,979		—		2,979
Total short-term investments	—		2,979		—		2,979
Total assets	$	178,821	$	22,098	$	—	$	200,919

	Fair Value Measurements at December 31, 2022 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(in thousands)
Cash equivalents:
Money market funds	$	48,833	$	—	$	—	$	48,833
Total cash equivalents	48,833		—		—		48,833
Short-term investments:
U.S. Treasury bonds	—		5,970		—		5,970
Corporate bonds	—		19,782		—		19,782
Commercial paper	—		798		—		798
Asset-backed securities	—		564		—		564
Total short-term investments	—		27,114		—		27,114
Total assets	$	48,833	$	27,114	$	—	$	75,947

As of September 30, 2023 and December 31, 2022, the carrying value of our long-term debt approximates its estimated fair value as the interest rate on the debt agreements is adjusted for changes in the market rates. See Note 6. Debt for additional information regarding our debt.

16

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

The fair value of our non-financial assets and liabilities, which include goodwill, intangible assets and property, plant and equipment, are measured on a non-recurring basis. Fair value adjustments are made in the period an impairment charge is recognized. The fair value of our reporting unit and indefinite-lived intangible asset are classified as Level 3 within the fair value hierarchy due to the significant unobservable inputs developed using company-specific information.

6. Debt

The following table summarizes information relating to our debt:

	September 30,				December 31,
	2023				2022
	Amount		Effective Rate		Amount		Effective Rate
	(in thousands, except interest rates)
Revolving credit facility	$	—	—	%	$	—	—	%
First Lien Term Loan (as amended) due Feb 2027	1,238,775		9.07	%	1,245,000		8.32	%
Total principal amount	1,238,775				1,245,000
Unamortized discount and debt issuance costs	(34,947)				(42,897)
Total debt	1,203,828				1,202,103
Less: Current portion of long-term debt	(12,450)				(9,338)
Total long-term debt	$	1,191,378			$	1,192,765

Senior Secured First Lien Credit Facilities

Our first lien credit agreement, as amended, or First Lien Credit Agreement, provides for senior secured first lien credit facilities, consisting of the following:

•a $1.245 billion U.S. dollar term loan, or First Lien Term Loan, with a final maturity date of February 5, 2027; and

•a $130.0 million revolving credit facility (with a letter of credit sub-facility in the amount of $35.0 million), or the Revolving Credit Facility, consisting of (i) a $112.5 million multicurrency tranche and (ii) a $17.5 million tranche available only in U.S. dollars, with a final maturity of the earlier of: November 23, 2027 or, in the event that there are more than $150.0 million of the First Lien Term Loan outstanding on the 91st day prior to maturity date of the first lien term loans, the 91st day prior to the maturity date of the First Lien Term Loan.

Borrowings under our Revolving Credit Facility bear interest at a floating rate which is, at our option, either (1) a secured overnight financing rate (“SOFR”) rate for a specified interest period plus an applicable margin of 2.25% or (2) a base rate plus an applicable margin of 1.25%, respectively. The SOFR rate applicable to the Revolving Credit Facility is subject to a “floor” of 0.0%.

Borrowings under our First Lien Term Loan bear interest at a floating rate which is, at our option, either (1) a SOFR rate for a specified interest period plus an applicable margin of 3.75% or (2) a base rate plus an applicable margin of 2.75%. The SOFR rate applicable to the First Lien Term Loan is subject to a “floor” of 0.0%.

The base rate for any day is a fluctuating rate per annum equal to the highest of (a) the rate of interest in effect for such day as publicly announced by Credit Suisse as its “prime rate” and (b) the federal funds effective rate in effect on such day plus 0.50% and (c) the one-month SOFR rate plus 1.0% per annum.

The First Lien Term Loan requires equal quarterly repayments equal to 0.25% of the principal amount.

In addition to paying interest on loans outstanding under the Revolving Credit Facility and the First Lien Term Loan, we are required to pay a commitment fee of 0.375% per annum of unused commitments under the Revolving Credit Facility.

The First Lien Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to: incur additional indebtedness; incur liens; engage in mergers, consolidations, liquidations or dissolutions; pay dividends and distributions on, or redeem, repurchase or retire our capital stock; and make certain investments, acquisitions, loans, or advances. In addition, the terms of the First Lien Credit Agreement include a financial covenant which requires that, at the end of each fiscal quarter, if the aggregate amount of borrowings under the Revolving Credit Facility exceeds 35% of the aggregate commitments under the Revolving Credit Facility, our first lien net leverage ratio cannot exceed 7.40 to 1.00. The First Lien Credit Agreement also contains certain customary representations and warranties, affirmative covenants and events of default. As of September 30, 2023, we were in compliance with all covenants of the First Lien Credit Agreement.

17

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

7. Loss Per Share

A reconciliation of the number of shares in the calculation of basic and diluted loss per share follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)
Basic loss per share
Numerator:
Net loss	$	(3,172)	$	(292,219)	$	(8,533)	$	(919,002)
Earnings allocated to unvested restricted stock	—		—		—		—
Net loss available to common stockholders	$	(3,172)	$	(292,219)	$	(8,533)	$	(919,002)
Denominator:
Weighted-average shares used in computing basic loss per share	165,275		161,111		164,089		160,545
Diluted loss per share
Numerator:
Net loss available to common stockholders	$	(3,172)	$	(292,219)	$	(8,533)	$	(919,002)
Denominator:
Weighted-average shares used in computing basic loss per share	165,275		161,111		164,089		160,545
Add dilutive impact of employee equity plans	—		—		—		—
Weighted-average shares used in computing diluted loss per share	165,275		161,111		164,089		160,545

The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of the diluted net loss per share attributable to common stockholders for the periods presented because their effect would have been anti-dilutive or the performance condition had not been met at the end of the period:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
	(in thousands)
Total anti-dilutive shares	14,024	12,185	14,056	11,449

The calculation of diluted loss per share requires us to make certain assumptions related to the use of proceeds that would be received upon the assumed exercise of stock options or proceeds from the employee stock purchase plan.

8. Income Taxes

For the three months ended September 30, 2023 and 2022, we recorded income tax expense of $12.3 million and $4.1 million, respectively, resulting in an effective tax rate of 134.9% and (1.4)%, respectively. For the nine months ended September 30, 2023 and 2022, we recorded income tax expense of $28.0 million and $11.9 million, respectively, resulting in an effective tax rate of 143.8% and (1.3)%, respectively. The increase in the effective tax rates for the three and nine months ended September 30, 2023 compared to the same periods in 2022 was primarily due to the effect of the goodwill impairment recognized in 2022, which is primarily non-deductible for income tax purpose, as well as an increase in the valuation allowance resulting from deduction limitations associated with the U.S. Tax Cuts and Jobs Act of 2017, or U.S. Tax Act.

Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. At September 30, 2023, we had accrued interest and penalties related to unrecognized tax benefits of approximately $4.6 million.

We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2013 through February 2016 and 2019 through 2022 tax years generally remain open and subject to examination by federal tax authorities. The 2015 through 2022 tax years generally remain open and subject to examination by the state tax authorities and foreign tax authorities. We are currently under examination by the IRS for the tax years 2013 through the period ending February 2016. We are currently under audit by the Texas Comptroller for the 2015 through 2020 tax years. The audit by the Indian Tax Authority for the 2017 tax year was closed during the three months ended September 30, 2023 with no changes. We are not currently under audit in any other taxing jurisdictions.

18

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

9. Commitments and Contingencies

Cyber Incident

As previously disclosed, we were the victim of a cyberattack on our Orion Software Platform and internal systems, or the Cyber Incident. We, together with our partners, have undertaken extensive measures to investigate, contain, eradicate, and remediate the Cyber Incident.

Expenses Incurred

We recorded pre-tax expenses (proceeds) related to the Cyber Incident as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)
Cost of recurring revenue	$	—	$	6	$	—	$	169
Sales and marketing	—		—		—		130
Research and development	—		—		—		2
General and administrative	7,901		36,823		15,509		45,992
Total gross expenses related to the Cyber Incident	7,901		36,829		15,509		46,293
Less: proceeds received or expected to be received under our insurance coverage	(5,000)		(26,000)		(19,798)		(26,000)
Total net expenses (proceeds) related to the Cyber Incident	$	2,901	$	10,829	$	(4,289)	$	20,293

General and administrative expense is presented net of insurance proceeds received and expected insurance proceeds for costs we believe are reimbursable and probable of recovery in our condensed consolidated statements of operations. Expenses include costs to investigate and remediate the Cyber Incident, costs of lawsuits and investigations related thereto, including settlement costs, legal and other professional services, and consulting services provided to customers at no charge, which were expensed as incurred, as well as estimated loss contingencies.

Litigation, Claims and Government Investigations

As a result of the Cyber Incident, we are subject to multiple lawsuits and investigations. A consolidated putative class action lawsuit alleging violations of the federal securities laws was filed against us and certain of our current and former officers. The complainants sought certification of a class of all persons who purchased or otherwise acquired our securities between October 18, 2018 and December 17, 2020 and sought unspecified monetary damages, costs and attorneys’ fees. On October 28, 2022, the parties entered into a binding settlement term sheet with respect to the securities class action lawsuit and lead plaintiff filed the parties’ Stipulation and Agreement of Settlement with the court on December 8, 2022. On March 2, 2023, we paid $26 million to fund claims submitted by class members, the legal fees of plaintiffs’ counsel and the costs of administering the settlement. On July 28, 2023, the court held a final settlement hearing after which the court entered an order and final judgment approving the settlement. The settlement resolves all claims asserted against us and the other named defendants in connection with the class action litigation and contains provisions that the settlement does not constitute an admission, concession, or finding of any fault, liability, or wrongdoing of any kind by us or any defendant. The settlement sum was reimbursed entirely by applicable directors’ and officers’ liability insurance. In addition, two shareholder derivative actions were filed, purportedly on behalf of the Company, one in the Western District of Texas and one in the Delaware Court of Chancery, in each case asserting breach of duty and other claims against certain of our current and former officers and directors in connection with the Cyber Incident. On October 13, 2022, the Delaware Court of Chancery entered an order dismissing the case in that court with prejudice, and on May 17, 2023, the Supreme Court of the State of Delaware entered an order affirming the Delaware Court of Chancery’s judgment. On July 12, 2023, the United States District Court for the Western District of Texas entered a final judgment dismissing the case in that court without prejudice.

In addition, there are several pending investigations and inquiries by U.S. regulatory authorities related to the Cyber Incident, including from the Department of Justice and the SEC. We are incurring, and in future periods expect to incur, costs and other expenses in connection with these investigations and inquiries. On October 30, 2023, the SEC filed a civil complaint, or the SEC Complaint, relating to the previously disclosed Wells Notices received by us and certain of our current and former executive officers and employees, in the United States District Court for the Southern District of New York naming us and our Chief Information Security Officer, or CISO, as defendants. The SEC Complaint alleges violations of the Exchange Act and the Securities Act relating to our cybersecurity disclosures and public statements, as well as our internal controls and disclosure controls and procedures. The SEC Complaint seeks permanent injunctions against the Company and our CISO, disgorgement of profits, civil penalties and a permanent officer-and-director bar against our CISO. We accrued an immaterial loss contingency

19

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

related to the SEC investigation during the three months ended September 30, 2023. We maintain that our disclosures, public statements, controls and procedures were appropriate, and intend to continue to vigorously defend ourselves. The ultimate results of the action initiated by the SEC Complaint are unknown at this time. Nevertheless, in connection with the SEC Complaint and any resulting litigation, we could incur losses that could be material. The Company will continue to evaluate information as it becomes known and will adjust our estimate for losses or will record additional losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. Losses associated with any adverse judgments, settlements, penalties or other resolutions of the SEC Complaint could be material to our business, results of operations, financial condition or cash flows in future periods.

Additional lawsuits and claims related to the Cyber Incident may be asserted by or on behalf of customers, stockholders or others seeking damages or other related relief and additional inquiries from governmental agencies may be received or investigations by governmental agencies commenced.

Insurance Coverage

We maintain $15 million of cybersecurity insurance coverage to limit our exposure to losses such as those related to the Cyber Incident, which renews annually. In addition, we maintain $50 million of directors and officers liability insurance coverage to reduce our exposure to our indemnification obligations for certain expenses incurred by our directors and officers, including as a result of the legal proceedings related to the Cyber Incident, which renews annually. As of September 30, 2023, we received $40 million of proceeds from our directors and officers liability insurance and have a loss recovery asset of $10 million recorded for insurance proceeds deemed probable of recovery which is included in prepaid and other current assets in our condensed consolidated balance sheet.

Indemnification

In connection with the separation and distribution of our managed service provider (“N-able”) business into a newly created and separately traded public company, N-able, Inc. (“Separation”), we entered into a separation and distribution agreement and related agreements with N‑able to govern the Separation and related transactions and the relationship between the respective companies going forward. The separation and distribution agreement provides for certain indemnity and liability obligations, including that we will indemnify N-able for all liabilities based upon, arising out of or related to the Cyber Incident other than certain specified expenses for which N-able will be responsible. The amount of the indemnification liability, if any, cannot be determined and has not been recorded in our condensed consolidated financial statements as of September 30, 2023.

Other Matters

In addition to the Cyber Incident described above, from time to time we are involved in litigation arising from the normal course of business. In management's opinion, this litigation is not expected to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

20

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially and adversely from those anticipated in the forward-looking statements. Please see the section entitled “Safe Harbor Cautionary Statement” above and the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, our Quarterly Report on Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023 and this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. The following discussion and analysis also includes a discussion of certain non-GAAP financial measures. For a description and reconciliation of the non-GAAP measures discussed in this section, see “Non-GAAP Financial Measures.”

Overview

SolarWinds is a leading provider of simple, powerful, and secure information technology, or IT, management and observability software. Our solutions are designed to give organizations worldwide, regardless of type, size, or complexity, the power to optimize performance of their hybrid IT environments, no matter where they are in their digital transformation journeys.

We offer a broad portfolio of solutions designed to help technology professionals and leaders to monitor, manage, and optimize networks, systems, databases and applications across on-premises, multi-cloud and hybrid IT infrastructures. Most of our offerings are built on a platform-based approach, that we call the SolarWinds Platform, to enable our customers to easily purchase and deploy our products individually or as an integrated offering as their needs evolve. We utilize a cost-efficient, integrated global product development model and have expanded our offerings over time through both organic development and strategic acquisitions. We intend to continue to innovate and invest in areas of product development to bring new products to market and enhance the functionality, ease of use, and integration of our current products. Over time, we intend to grow our subscription revenue by focusing more on selling subscriptions over perpetual licenses, which we call our subscription-first approach.

On February 5, 2016, we were acquired by affiliates of Silver Lake Group, L.L.C. and Thoma Bravo, LLC in a take private transaction, or the Take Private. In October 2018, we completed our initial public offering, or IPO, and once again become a publicly traded company. 

Cyber Incident

As previously disclosed, we were the victim of a cyberattack on our Orion Software Platform and internal systems, or the “Cyber Incident.” We, together with our partners, have undertaken extensive measures to investigate, contain, eradicate, and remediate the Cyber Incident. In addition, as part of our “Secure by Design” initiative, we continue to work with industry experts to implement enhanced security practices designed to further strengthen and protect our products and environment against these and other types of attacks in the future.

Expenses

Expenses incurred related to the Cyber Incident include costs to investigate and remediate the Cyber Incident, costs of lawsuits and investigations related thereto, including settlement costs, legal and other professional services, and consulting services provided to customers at no charge which were expensed as incurred, as well as estimated loss contingencies. We expect to continue to incur additional legal and other professional services costs and expenses associated with the Cyber Incident in future periods as we defend ourselves in litigation with the SEC, and such costs and expenses could be material. We have exhausted our insurance coverage under our applicable insurance policies and will therefore be required to pay for such costs without reimbursement. We expect to recognize these expenses as services are received. See Note 9. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information related to the legal proceedings and governmental investigations related to the Cyber Incident.

Our “Secure by Design” initiatives, which include costs to enhance our security measures across our systems and our software development and build environments, continue to be included in our ongoing research and development expense, as well as general and administrative expense.

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Litigation, Claims and Government Investigations

As a result of the Cyber Incident, we are subject to several lawsuits and investigations or inquiries as described in Note 9. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Impacts of Macroeconomic Conditions

As a global company, we are subject to negative impacts and risks related to prevailing macroeconomic conditions and significant events with macroeconomic impacts, including, but not limited to, the ongoing conflicts in Israel and the Ukraine, resulting sanctions and other actions against Russia and Belarus, geopolitical tensions involving China, market conditions related to inflation and action taken by central banks to counter inflation, fluctuating foreign currency exchange rates, changes in interest rates, instability in the banking sector and financial services industry, supply chain disruption issues and the effects of the COVID-19 pandemic. We have suspended all of our business activities in Russia and Belarus, but such suspension has not had, and we do not expect it to have, a material impact on our financial results. In addition, although we have operations in Israel, we do not expect the recent outbreak of war to have a material impact on our operations or our financial results. Foreign currency exchange rate fluctuations during the prior year negatively impacted our revenues and may continue to impact our revenues in 2023. In addition, rising interest rates have increased our borrowing expense under our credit agreement, and if rates continue to rise, our borrowing costs may continue to increase. We continuously monitor the direct and indirect impacts of these events on our business and financial results, as well as the overall global economy, and we anticipate that these macroeconomic events could continue to negatively impact our results of operation. See Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and Part II, Item 1A “Risk Factors” in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023 for further discussion of the possible impacts of these macroeconomic conditions on our business and financial results.

Third Quarter Highlights

Below are our key financial highlights for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Customers

Our approach allows us to both sell to a broad group of potential customers and close large transactions with significant customers. As of September 30, 2023, we had over 300,000 customers. While some customers may spend as little as $100 with us over a twelve-month period, we had 955 customers who spent more than $100,000 with us for the trailing twelve-month period ended September 30, 2023 as compared to 882 for the trailing twelve-month period ended September 30, 2022.

We define customers as individuals or entities that have purchased one or more of our products under a unique customer identification number since our inception for our perpetual license products and individuals or entities that have an active subscription for at least one of our subscription products. Each unique customer identification number constitutes a separate customer regardless of the amount purchased. We may have multiple purchasers of our products within a single organization, each of which may be assigned a unique customer identification number and deemed a separate customer.

Annual Recurring Revenue (ARR)

We use Subscription Annual Recurring Revenue, or Subscription ARR, and Total Annual Recurring Revenue, or Total ARR, to better understand and assess the performance of our business, as our mix of revenue generated from recurring revenue has increased in recent years. Subscription ARR and Total ARR each provides a normalized view of customer retention, renewal and expansion, as well as growth from new customers. Subscription ARR and Total ARR should each be viewed independently of revenue and deferred revenue and are not intended to be combined with or to replace either of those items.

Beginning in the quarter ended December 31, 2022, we revised the methodology used to calculate Total ARR. In calculating Total ARR, we now only recognize the impact of any price increases upon renewal of the expiring maintenance contracts rather than upon enactment of such price increases. We believe this change in methodology better represents the current value of our maintenance contracts and better aligns our definition with comparable companies.

Total ARR for the prior period ended September 30, 2022 presented below has been recalculated to conform to the current calculation method. The change in calculation method reduced our previously reported Total ARR as of September 30, 2022 by $2.3 million. There have been no changes in the calculation method for Subscription ARR.

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	As of September 30,				Year-over-Year Growth
	2023		2022
	(in thousands, except percentages)
Subscription ARR(1)	$	213,385	$	159,477	33.8	%
Total ARR(2)	668,340		621,092		7.6

______

(1)Subscription ARR represents the annualized recurring value of all active subscription contracts at the end of a reporting period.

(2)Total ARR represents the sum of Subscription ARR and the annualized value of all maintenance contracts related to perpetual licenses active at the end of a reporting period.

The year-over-year growth in Subscription ARR was primarily driven by sales of our time-based subscription offerings as a result of customers transitioning to our subscription products and pricing models, including our SolarWinds Hybrid Cloud Observability, as well as sales of our database monitoring and service desk subscription solutions. Total ARR increased primarily due to the growth in Subscription ARR, partially offset by the decline in the annualized value of maintenance contracts as a result of lower new perpetual license sales and the impact of customers transitioning to our subscription offerings.

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 our time-based subscription offerings. We recognize revenue for SaaS offerings, including our SolarWinds Observability solution, ratably over the subscription term once the service is made available to the customer or when we have the right to invoice services performed. We also offer time-based subscription offerings for our SolarWinds Hybrid Cloud Observability solution along with many of our products historically sold as perpetual licenses, such as our network, systems and database management products, to give customers additional flexibility when purchasing our products. Revenue for our time-based subscription offerings, including multi-year arrangements, is recognized upfront upon delivery of the on-premise software license and ratably over the contract period for the related support. We generally invoice our time-based subscription agreements in advance at the beginning of the subscription period and invoice our SaaS offerings over the subscription period on either a monthly or annual basis and to a lesser extent, monthly based on usage. Our subscription revenue grows as customers transition to our subscription model, add new subscription products, upgrade the capacity level of their existing subscription products or increase the usage of their subscription products. In addition, while the majority of our contracts include annual subscription periods, subscription revenue is impacted by the timing, duration and volume of multi-year time-based subscription arrangements sold during a period, which impacts the amount of revenue recognized upfront and may cause subscription revenue to fluctuate.

•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. We also include professional services and other revenue in maintenance revenue, which is generally recognized ratably or as delivered.

•License Revenue. We derive license revenue from sales of perpetual licenses of our on-premise network, systems, storage and database management products to new and existing customers. We include one year of maintenance services as part of our customers’ initial license purchase. License revenue is recognized upfront 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.

Our continued efforts to increase sales of our subscription offerings as part of our subscription-first approach has impacted the mix of license and recurring revenue. As we introduce new subscription offerings and incentivize our sales teams to focus on more subscription sales, we expect a continued shift in our revenue mix each quarter as existing customers transition to, and

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new customers purchase, our subscription offerings. However, due to uncertainty regarding the level of customer adoption of our subscription offerings, the timing and impact of this transition are difficult to predict at this time. While we encourage customers to transition to our subscription offerings, we do not require them to transition and we plan to continue to sell perpetual licenses and renew maintenance services for our network, systems and database management products. Our license sales and maintenance renewals may decline or fluctuate in future periods as customers transition to our subscription offerings.

Cost of Revenue

•Cost of Recurring Revenue. Cost of recurring revenue primarily consists of technical support personnel costs, public cloud infrastructure and hosting fees, amortization of capitalized development costs related to our hosted solutions and an allocation of overhead costs for our subscription revenue and maintenance services. Allocated costs consist of certain facilities, depreciation, benefits and IT costs allocated based on headcount. We expect our public cloud infrastructure and hosting fees and amortization of capitalized development costs to increase as we expand our subscription-based offerings.

•Amortization of Acquired Technologies. Amortization of acquired technologies consists of amortization related to capitalized costs of technologies acquired, including those acquired in connection with the Take Private.

Operating Expenses

Operating expenses consists of sales and marketing, research and development and general and administrative expenses as well as amortization of acquired intangibles. Generally, personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, sales commissions, stock-based compensation and an allocation of overhead costs based on headcount. The total number of employees as of September 30, 2023 was 2,093, as compared to 2,304 as of September 30, 2022. During 2023, as part of our ongoing efforts to improve our operating margins, we completed certain restructuring activities, resulting in lease impairment charges and other costs incurred in connection with the exiting of certain leased facilities and other contracts, as well as costs related to headcount reductions.

While we are focused on disciplined expense management, we expect our operating expenses to continue to increase in absolute dollars as we make long-term investments in our business, including continued product development and increasing our selling efforts toward enterprise customers and expanding our routes to market. Our operating expenses in future periods also may increase in absolute dollars and fluctuate as a percentage of revenue as a result of any future acquisitions and any further decisions to increase our investment in our business. Our stock-based compensation expense has increased due to equity awards granted to our employees and directors, and we intend to continue to grant equity awards which will result in additional stock-based compensation expense in future periods.

•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. As part of our ongoing efforts to improve our operating margins, we have and expect to continue to invest selectively in our marketing programs as we look to optimize our sales and marketing productivity and expand our routes to market.

•Research and Development. Research and development expenses primarily consist of related personnel costs for our product development employees and executives and, to a lesser extent, contractor fees. We capitalize certain research and development costs related to developing new functionality for our solutions that are hosted and accessed by our customers on a subscription basis, which may cause our research and development expense to fluctuate from period to period.

•General and Administrative. General and administrative expenses primarily consist of personnel costs for our executive, finance, legal, human resources and other administrative personnel, general restructuring costs, acquisition costs, certain Cyber Incident costs, professional fees, certain non-cash impairment charges and other general corporate expenses. The Cyber Incident has resulted in increased general and administrative expenses which we expect to continue in 2023 and beyond, although such expenses may continue to fluctuate from period to period.

•Amortization of Acquired Intangibles. We amortize to operating expenses the capitalized costs of intangible assets acquired in connection with the Take Private and our other acquisitions.

•Goodwill Impairment. We review our goodwill for impairment on an annual basis or more frequently if there is an indication that impairment may exist. An impairment of goodwill is recognized when the carrying value of our reporting unit exceeds its fair value as of the assessment date and recorded as a separate component of operating expenses.

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Other Income (Expense)

Other income (expense) primarily consists of interest expense, interest income and gains (losses) resulting from changes in exchange rates on foreign currency denominated accounts. The interest expense on our debt has increased due to increases in interest rates and as a result of the increase in applicable margins resulting from the refinancing of our debt in November 2022. We expect our interest expense may continue to increase as a result of anticipated interest rate increases since the borrowings outstanding under our credit agreement currently bear interest at variable rates.

Foreign Currency

As a global company, we face exposure to adverse movements in foreign currency exchange rates. Fluctuations in foreign currencies impact the amount of total assets, liabilities, revenue, operating expenses and cash flows that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for additional information on how foreign currency impacts our financial results.

Income Tax Expense (Benefit)

Income tax expense (benefit) consists of domestic and foreign corporate income taxes related to the sale of products. The tax rate on income earned by our North American entities is generally higher than the tax rate on income earned by our international entities. We expect the income earned by our international entities to grow over time as a percentage of total income, which could result in a decline in our effective income tax rate. However, our effective tax rate will be affected by many other factors including changes in tax laws, regulations or rates, new interpretations of existing laws or regulations, shifts in the allocation of income earned throughout the world and changes in overall levels of income before tax.

Comparison of the Three Months Ended September 30, 2023 and 2022

Revenue

	Three Months Ended September 30,
	2023				2022
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change
	(in thousands, except percentages)
Subscription	$	58,764	31.0	%	$	42,248	23.6	%	$	16,516
Maintenance	116,415		61.4		114,381		63.8		2,034
Total recurring revenue	175,179		92.4		156,629		87.3		18,550
License	14,412		7.6		22,767		12.7		(8,355)
Total revenue	$	189,591	100.0	%	$	179,396	100.0	%	$	10,195

Total revenue increased $10.2 million, or 5.7%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to an increase in recurring revenue partially offset by a decrease in license revenue as we continue to transition to a subscription model. Revenue from North America was approximately 69% and 71% of total revenue for the three months ended September 30, 2023 and 2022, 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.

As a result of macroeconomic conditions, certain of our customers have, and others may, defer renewals or cancel subscriptions which has had, and could in the future have, a negative impact on our revenue. However, despite the impact of macroeconomic conditions, our maintenance renewal rate for the trailing twelve month period was 95%.

Recurring Revenue

Subscription Revenue. Subscription revenue increased $16.5 million, or 39.1%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to increased sales of our time-based subscription offerings resulting from existing customers transitioning to our subscription pricing model and new customers purchasing our subscription solutions, including our SolarWinds Hybrid Cloud Observability solution. The increase in subscription revenue includes a $1.7 million increase resulting from an increase in sales of multi-year time-based arrangements during the period. Our subscription revenue increased as a percentage of our total revenue for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

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Our net retention rate for our subscription products was as follows:

	Trailing Twelve Months Ended September 30,
	2023		2022
Net retention rate(1)	93	%	96	%

_______

(1)Net retention rate for subscription products represents the implied monthly subscription revenue at the end of a period for the base set of customers from which we generated subscription revenue in the year prior to the calculation, divided by the implied monthly subscription revenue one year prior to the date of the calculation for that same customer base.

The decrease in net retention rate for the period is primarily attributable to the impacts of customer attrition in certain of our established subscription products, partially offset by stronger net retention rates of our Observability solutions.

Maintenance Revenue. Maintenance revenue increased $2.0 million, or 1.8%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to strong maintenance renewal rates, the impact of price increases on our maintenance services and increased sales of professional services and other revenue, partially offset by the impact on maintenance revenue from conversions of customers to subscription-based products.

Our maintenance renewal rate for our perpetual license products was as follows:

	Trailing Twelve Months Ended September 30,
	2023		2022
Maintenance renewal rate(1)	95	%	91	%

_______

(1)Maintenance renewal rate represents the sales of maintenance services for all existing maintenance contracts expiring in a period, divided by the sum of previous sales of maintenance services corresponding to those services expiring in the current period. The calculation of maintenance renewal rate only includes customers renewing maintenance contracts and excludes all customers that transition from maintenance contracts to subscription offerings. Sales of maintenance services includes sales of maintenance renewals for a previously purchased product and the amount allocated to maintenance revenue from a license purchase.

License Revenue

License revenue decreased $8.4 million, or 36.7%, primarily due to the impact of customers transitioning to our subscription offerings including an increase in the subscription sales of our SolarWinds Hybrid Cloud Observability solution and other products that have historically been sold only as perpetual licenses. We expect license revenue to continue to decline as customers transition to our subscription offerings.

Cost of Revenue

	Three Months Ended September 30,
	2023				2022
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change
	(in thousands, except percentages)
Cost of recurring revenue	$	17,957	9.5	%	$	16,563	9.2	%	$	1,394
Amortization of acquired technologies	3,412		1.8		3,628		2.0		(216)
Total cost of revenue	$	21,369	11.3	%	$	20,191	11.3	%	$	1,178

Total cost of revenue increased in the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to an increase in amortization of capitalized development costs of $1.6 million, partially offset by decreases in public cloud infrastructure and hosting fees related to our subscription offerings and personnel costs of $0.3 million and amortization of acquired technologies of $0.2 million.

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Operating Expenses

	Three Months Ended September 30,
	2023				2022
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change
	(in thousands, except percentages)
Sales and marketing	$	59,675	31.5	%	$	64,813	36.1	%	$	(5,138)
Research and development	27,308		14.4		22,562		12.6		4,746
General and administrative	31,101		16.4		42,558		23.7		(11,457)
Amortization of acquired intangibles	11,613		6.1		13,045		7.3		(1,432)
Goodwill impairment	—		—		278,706		155.4		(278,706)
Total operating expenses	$	129,697	68.4	%	$	421,684	235.1	%	$	(291,987)

Sales and Marketing. Sales and marketing expenses decreased $5.1 million, or 7.9%, primarily due to a decrease in marketing program costs.

Research and Development. Research and development expenses increased $4.7 million, or 21.0%, primarily due to an increase in personnel costs of $2.2 million, restructuring charges primarily related to severance expense of $1.7 million as well as costs for subscriptions used in the development of our offerings of $1.1 million.

General and Administrative. General and administrative expenses decreased $11.5 million, or 26.9%, primarily due to decreases in net Cyber Incident costs of $7.9 million and non-cash impairment charges related to the impairment of the SolarWinds trade name recognized in the previous year of $5.9 million, as well as a decrease in the provision for losses on accounts receivable of $1.2 million. These decreases were partially offset by an increase in personnel costs of $3.4 million.

Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased $1.4 million, or 11.0%, primarily due to certain acquired intangibles being fully amortized.

Goodwill Impairment. As a result of the interim goodwill impairment analysis at September 30, 2022, we recognized a $278.7 million non-cash goodwill impairment charge for the three months ended September 30, 2022.

Interest Expense, Net

	Three Months Ended September 30,
	2023				2022
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change
	(in thousands, except percentages)
Interest expense, net	$	(29,314)	(15.5)	%	$	(23,181)	(12.9)	%	$	(6,133)

Interest expense, net increased by $6.1 million, or 26.5%, in the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in interest expense is primarily due to the increase in interest rates on our debt, including an increase in applicable margins resulting from the refinancing of our debt in November 2022. The weighted-average effective interest rate on our debt was 9.0% for the three months ended September 30, 2023 compared to 5.0% for the three months ended September 30, 2022. See Note 6. Debt in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt.

Other Income (Expense), Net

	Three Months Ended September 30,
	2023				2022
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change
	(in thousands, except percentages)
Other income (expense), net	$	(121)	(0.1)	%	$	(2,418)	(1.3)	%	$	2,297

Other income (expense), net increased by $2.3 million in the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to a $1.9 million loss on extinguishment of debt related to the partial

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debt repayment made in September 2022, along with the impact of changes in exchange rates on foreign currency denominated accounts.

Income Tax Expense

	Three Months Ended September 30,
	2023					2022
	Amount			Percentage of Revenue		Amount			Percentage of Revenue		Change
	(in thousands, except percentages)
Income (loss) before income taxes	$	9,090		4.8	%	$	(288,078)		(160.6)	%	$	297,168
Income tax expense	12,262			6.5		4,141			2.3		8,121
Effective tax rate	134.9		%			(1.4)		%			136.3		%

Our income tax expense for the three months ended September 30, 2023 was $12.3 million as compared to $4.1 million for the three months ended September 30, 2022. The effective tax rate increased to 134.9% for the period, primarily due to an increase in the valuation allowance resulting from deduction limitations associated with the U.S. Tax Act. Additionally, the effective tax rate for the three months ended September 30, 2022 included the effect of the goodwill impairment, which is primarily non-deductible for income tax purposes. For additional discussion about our income taxes, see Note 8. Income Taxes in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q.

Comparison of the Nine Months Ended September 30, 2023 and 2022

Revenue

	Nine Months Ended September 30,
	2023				2022
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change
	(in thousands, except percentages)
Subscription	$	166,510	29.7	%	$	117,975	22.2	%	$	48,535
Maintenance	346,949		61.9		343,848		64.6		3,101
Total recurring revenue	513,459		91.6		461,823		86.8		51,636
License	47,142		8.4		70,475		13.2		(23,333)
Total revenue	$	560,601	100.0	%	$	532,298	100.0	%	$	28,303

Total revenue increased $28.3 million, or 5.3%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to an increase in recurring revenue, partially offset by a decrease in license revenue as we continue to transition to a subscription model. Revenue from North America was approximately 69% and 70% of total revenue for the nine months ended September 30, 2023 and 2022, 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.

Recurring Revenue

Subscription Revenue. Subscription revenue increased $48.5 million, or 41.1%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to increased sales of our time-based subscription offerings resulting from customers transitioning to our subscription pricing model, including our SolarWinds Hybrid Cloud Observability solution, and includes a $7.7 million increase resulting from an increase in sales of multi-year time-based arrangements during the period.

Our net retention rate for our subscription products was as follows:

	Trailing Twelve Months Ended September 30,
	2023		2022
Net retention rate(1)	93	%	96	%

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_______

(1)Net retention rate for subscription products represents the implied monthly subscription revenue at the end of a period for the base set of customers from which we generated subscription revenue in the year prior to the calculation, divided by the implied monthly subscription revenue one year prior to the date of the calculation for that same customer base.

The decrease in net retention rate for the period is primarily attributable to the impacts of customer attrition in certain of our established subscription products, partially offset by stronger net retention rates of our Observability solutions.

Maintenance Revenue. Maintenance revenue increased $3.1 million, or 0.9%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to increased sales of professional services and other revenue, as well as strong maintenance renewal rates and the impact of price increases on our maintenance services, partially offset by the impact on maintenance revenue from conversions of customers to subscription-based products.

Our maintenance renewal rate for our perpetual license products was as follows:

	Trailing Twelve Months Ended September 30,
	2023		2022
Maintenance renewal rate(1)	95	%	91	%

_______

(1)Maintenance renewal rate represents the sales of maintenance services for all existing maintenance contracts expiring in a period, divided by the sum of previous sales of maintenance services corresponding to those services expiring in the current period. The calculation of maintenance renewal rate only includes customers renewing maintenance contracts and excludes all customers that transition from maintenance contracts to subscription offerings. Sales of maintenance services includes sales of maintenance renewals for a previously purchased product and the amount allocated to maintenance revenue from a license purchase.

License Revenue

License revenue decreased $23.3 million, or 33.1%, primarily due to the impact of customers transitioning to our subscription offerings including an increase in the subscription sales of our SolarWinds Hybrid Cloud Observability solution and other products that have historically been sold only as perpetual licenses.

Cost of Revenue

	Nine Months Ended September 30,
	2023				2022
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change
	(in thousands, except percentages)
Cost of recurring revenue	$	54,884	9.8	%	$	49,854	9.4	%	$	5,030
Amortization of acquired technologies	10,273		1.8		24,503		4.6		(14,230)
Total cost of revenue	$	65,157	11.6	%	$	74,357	14.0	%	$	(9,200)

Total cost of revenue decreased in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to a decrease in amortization of acquired technologies due to certain intangible assets, acquired in connection with the Take Private, being fully amortized. Cost of recurring revenue increased primarily due to increases in amortization of capitalized development costs of $4.1 million, public cloud infrastructure and hosting fees related to our subscription offerings of $2.1 million and contract services of $1.2 million. These increases were partially offset by a decrease in personnel costs of $1.9 million.

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Operating Expenses

	Nine Months Ended September 30,
	2023				2022
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change
	(in thousands, except percentages)
Sales and marketing	$	185,429	33.1	%	$	190,472	35.8	%	$	(5,043)
Research and development	75,180		13.4		68,092		12.8		7,088
General and administrative	91,120		16.3		116,505		21.9		(25,385)
Amortization of acquired intangibles	36,712		6.5		39,387		7.4		(2,675)
Goodwill impairment	—		—		891,101		167.4		(891,101)
Total operating expenses	$	388,441	69.3	%	$	1,305,557	245.3	%	$	(917,116)

Sales and Marketing. Sales and marketing expenses decreased $5.0 million, or 2.6%, primarily due to a decrease in marketing program costs of $11.4 million, partially offset by increases in personnel costs of $3.0 million, which includes an increase in stock-based compensation expense of $2.2 million, restructuring charges primarily related to severance expense of $2.7 million and subscription costs of $0.9 million.

Research and Development. Research and development expenses increased $7.1 million, or 10.4%, primarily due to increases in personnel costs of $3.3 million, which includes an increase in stock-based compensation expense of $1.4 million, costs for subscriptions used in the development of our offerings of $2.3 million and restructuring charges primarily related to severance expense of $1.9 million.

General and Administrative. General and administrative expenses decreased $25.4 million, or 21.8%, primarily due to a decrease of $24.3 million in costs related to the Cyber Incident, net of expected insurance proceeds. In addition, non-cash impairment charges decreased $15.2 million related to the impairment of the SolarWinds trade name recognized in the prior year, and directors and officers liability and cybersecurity insurance costs and professional fees decreased $2.1 million. These decreases were partially offset by increases in restructuring charges of $13.9 million primarily related to lease impairment charges and accelerated depreciation expense in connection with the exiting of certain leased facilities and personnel costs of $5.0 million.

Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased $2.7 million, or 6.8%, primarily due to certain acquired intangibles being fully amortized during the period and the impact of changes in foreign currency exchange rates.

Goodwill Impairment. As a result of the interim goodwill impairment analyses performed at June 30, 2022 and September 30, 2022, we recognized $891.1 million in non-cash goodwill impairment charges.

Interest Expense, Net

	Nine Months Ended September 30,
	2023				2022
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change
	(in thousands, except percentages)
Interest expense, net	$	(87,338)	(15.6)	%	$	(57,669)	(10.8)	%	$	(29,669)

Interest expense, net increased by $29.7 million, or 51.4%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in interest expense is primarily due to increases in interest rates on our debt, including an increase in applicable margins resulting from the refinancing of our debt in November 2022. The weighted-average effective interest rate on our debt for the nine months ended September 30, 2023 was 8.8% compared to 3.8% for the nine months ended September 30, 2022. See Note 6. Debt in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt.

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Other Income (Expense), Net

	Nine Months Ended September 30,
	2023				2022
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change
	(in thousands, except percentages)
Other income (expense), net	$	(197)	—	%	$	(1,861)	(0.3)	%	$	1,664

Other income (expense), net increased by $1.7 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to a $1.9 million loss on extinguishment of debt related to the partial debt repayment made in September 2022, offset by the impact of changes in exchange rates on foreign currency denominated accounts.

Income Tax Expense

	Nine Months Ended September 30,
	2023					2022
	Amount			Percentage of Revenue		Amount			Percentage of Revenue		Change
	(in thousands, except percentages)
Income (loss) before income taxes	$	19,468		3.5	%	$	(907,146)		(170.4)	%	$	926,614
Income tax expense	28,001			5.0		11,856			2.2		16,145
Effective tax rate	143.8		%			(1.3)		%			145.1		%

Our income tax expense for the nine months ended September 30, 2023 was $28.0 million as compared to $11.9 million for the nine months ended September 30, 2022. The effective tax rate increased to 143.8% for the period primarily due to an increase in the valuation allowance resulting from deduction limitations associated with the U.S. Tax Act. Additionally, the effective tax rate for the nine months ended September 30, 2022 included the effect of the goodwill impairment, which is primarily non-deductible for income tax purposes. For additional discussion about our income taxes, see Note 8. Income Taxes in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10‑Q.

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, the Cyber Incident, restructuring costs and goodwill and indefinite-lived intangible asset impairment, as well as the related tax impacts of these items can have a material impact on our GAAP financial results.

Non-GAAP Operating Income and Non-GAAP Operating Margin

We provide non-GAAP operating income and related non-GAAP margin excluding such items as amortization of acquired intangible assets, stock-based compensation expense and related employer-paid payroll taxes, acquisition and other costs, restructuring costs, Cyber Incident costs and goodwill and indefinite-lived asset impairment. Management believes these measures are useful for the following reasons:

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•Amortization of Acquired Intangible Assets. We provide non-GAAP information that excludes expenses related to purchased intangible assets associated with our acquisitions including our acquired technologies. 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 acquisitions, such as legal, accounting and advisory fees, changes in fair value of contingent consideration, costs related to integrating the acquired businesses, deferred compensation, severance and retention expense. In addition, we exclude certain other non-recurring costs, including internal investigation costs. 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 we would not have otherwise incurred in the normal course of our organic business operations. We believe that providing these non-GAAP measures that exclude acquisition and other costs, allows users of our financial statements to better review and understand the historical and current results of our continuing operations, and also facilitates comparisons to our historical results and results of less acquisitive peer companies, both with and without such adjustments.

•Restructuring Costs. We provide non-GAAP information that excludes restructuring costs such as severance, lease impairments and other costs incurred in connection with the exiting of certain leased facilities and other contracts as they relate to our corporate restructuring and exit activities and costs related to the separation of employment with executives of the Company. In addition, we exclude certain costs resulting from the spin-off of N-able, Inc. 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, costs of lawsuits and investigations related thereto, including settlement costs and legal and other professional services, consulting services being provided to customers at no charge and estimated loss contingencies. Cyber Incident costs are provided net of expected and received insurance reimbursements, although the timing of recognizing insurance reimbursements may differ from the timing of recognizing the associated expenses. We expect to incur significant legal and other professional services expenses associated with the Cyber Incident in future periods. The Cyber Incident results in operating expenses we would not have otherwise incurred in the normal course of our organic business operations. We believe that providing non-GAAP measures that exclude these costs facilitates a more meaningful evaluation of our operating performance and comparisons to our past operating performance. We continue to invest significantly in cybersecurity and expect to make additional investments. These estimated investments are in addition to the Cyber Incident costs and not included in the net Cyber Incident costs reported.

•Goodwill and Indefinite-lived Intangible Asset Impairment. We provide non-GAAP information that excludes non-cash goodwill and indefinite-lived intangible asset impairment charges. We believe that providing these non-GAAP measures that exclude these non-cash impairment charges allows users of our financial statements to better review and understand our historical and current operating results. In addition, as a significant portion of our goodwill and indefinite-lived intangible assets were derived from the Take Private transaction, providing these non-GAAP measures that exclude these impairment charges facilitates comparisons to our peers who may not have undertaken a transformational acquisition resulting in significant goodwill and indefinite-lived intangible assets.

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(in thousands, except percentages)
GAAP operating income (loss)	$	38,525		$	(262,479)		$	107,003		$	(847,616)
Stock-based compensation expense and related employer-paid payroll taxes	20,887			17,991			56,587			51,469
Amortization of acquired technologies	3,412			3,628			10,273			24,503
Amortization of acquired intangibles	11,613			13,045			36,712			39,387
Acquisition and other costs	1,804			146			1,928			432
Restructuring costs(1)	2,020			43			20,214			1,473
Cyber Incident costs, net	2,901			10,829			(4,289)			20,293
Goodwill and indefinite-lived intangible asset impairment	—			284,590			—			906,350
Non-GAAP operating income	$	81,162		$	67,793		$	228,428		$	196,291
GAAP operating margin	20.3		%	(146.3)		%	19.1		%	(159.2)		%
Non-GAAP operating margin	42.8		%	37.8		%	40.7		%	36.9		%

_______

(1)Restructuring costs for the nine months ended September 30, 2023 includes $13.9 million of non-cash lease impairment and other charges incurred in connection with the exiting of certain leased facilities.

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 (loss), excluding amortization of acquired intangible assets and developed technology, depreciation expense, stock-based compensation expense and related employer-paid payroll taxes, restructuring costs, acquisition and other costs, Cyber Incident costs, net, goodwill and indefinite-lived intangible asset impairment charges, interest expense, net, debt-related costs including fees related to our credit agreements, debt extinguishment and refinancing costs, unrealized foreign currency (gains) losses, and income tax expense (benefit). We define adjusted EBITDA margin as adjusted EBITDA divided by total 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 does not reflect changes in, or cash requirements for, our working capital needs; adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net income (loss) and our other GAAP results. In evaluating adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation of adjusted EBITDA. Adjusted EBITDA is not a presentation made in accordance with GAAP and the use of the term varies from others in our industry.

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(in thousands, except margin data)
Net loss	$	(3,172)		$	(292,219)		$	(8,533)		$	(919,002)
Amortization and depreciation	19,678			20,048			60,636			74,107
Income tax expense	12,262			4,141			28,001			11,856
Interest expense, net	29,314			23,181			87,338			57,669
Unrealized foreign currency (gains) losses	(730)			(458)			(614)			(898)
Acquisition and other costs	1,804			146			1,928			432
Debt-related costs(1)	98			2,025			301			2,222
Stock-based compensation expense and related employer-paid payroll taxes	20,887			17,991			56,587			51,469
Restructuring costs	2,020			43			20,214			1,433
Cyber Incident costs, net	2,901			10,829			(4,289)			20,293
Goodwill and indefinite-lived intangible asset impairment	—			284,590			—			906,350
Adjusted EBITDA	$	85,062		$	70,317		$	241,569		$	205,931
Adjusted EBITDA margin	44.9		%	39.2		%	43.1		%	38.7		%

_______

(1)Debt related costs for both the three and nine months ended September 30, 2022 includes a non-cash loss on extinguishment of debt of $1.9 million.

Liquidity and Capital Resources

Cash and cash equivalents and short-term investments were $235.2 million as of September 30, 2023. Our international subsidiaries held approximately $26.7 million of cash and cash equivalents, of which 40.9% were held in Euros. We intend either to invest our foreign earnings permanently in foreign operations or to remit these earnings to our U.S. entities in a tax-free manner with the exception for immaterial state income taxes. The U.S. Tax Act imposed a mandatory transition tax on accumulated foreign earnings and eliminates U.S. federal income taxes on foreign subsidiary distribution.

Our primary source of cash for funding operations and growth has been through cash provided by operating activities. We continue to evaluate the nature and extent of the impact of the Cyber Incident to our business and financial position. Although we recorded an immaterial estimated loss contingency, the amount of loss that might result from adverse judgments, settlements, penalties, or other resolution of the SEC Complaint or any other proceedings is unknown. Such potential payments, if great enough, could have an adverse effect on our liquidity. In addition, there continues to be uncertainty in the rapidly changing market and macroeconomic conditions related in part to the wars in Israel and Ukraine, market conditions related to inflation, fluctuating foreign currency exchange rates, changes in interest rates, geopolitical tensions involving China and instability in the banking sector and financial services industry. 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 September 30, 2023, our total indebtedness was $1.2 billion, with up to $130.0 million of available borrowings under our revolving credit facility. See Note 6. Debt in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt.

First Lien Credit Agreement

The First Lien Credit Agreement, as amended, provides for a senior secured revolving credit facility in an aggregate principal amount of $130.0 million, or the Revolving Credit Facility, consisting of a $17.5 million U.S. dollar revolving credit

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facility, or the U.S. Dollar Revolver, and a $112.5 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 amended aggregate principal amount of $1,245.0 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.

The First Lien Term Loan requires equal quarterly repayments equal to 0.25% of the principal amount and has a final maturity date of February 5, 2027. We have made voluntary debt prepayments in prior periods and may continue to evaluate opportunities for additional debt prepayments in order to reduce our levels of gross debt.

Summary of Cash Flows

Summarized cash flow information is as follows:

	Nine Months Ended September 30,
	2023		2022
	(in thousands)
Net cash provided by operating activities	$	118,189	$	106,726
Net cash provided by (used in) investing activities	10,747		(74,126)
Net cash used in financing activities	(17,431)		(320,839)
Effect of exchange rate changes on cash and cash equivalents	(1,012)		(2,216)
Net increase (decrease) in cash and cash equivalents	$	110,493	$	(290,455)

Operating Activities

Our primary source of cash from operating activities is cash collections from our customers. We expect cash inflows from operating activities to be affected by the timing of our sales. Our primary uses of cash from operating activities are for personnel-related expenditures, and other general operating expenses, as well as payments related to taxes, interest and facilities.

For the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, the $11.5 million increase in cash provided by operating activities was primarily due to the increase in our operating income, adjusted for non-cash items including the goodwill and indefinite-lived intangible asset impairment charges recorded during the nine months ended September 30, 2022. This increase was partially offset by increased cash outflows resulting from the changes in our operating assets and liabilities related to the timing of sales and cash payments and receipts. The net cash outflow resulting from the changes in our operating assets and liabilities was $9.4 million for the nine months ended September 30, 2023 as compared to $3.5 million for the nine months ended September 30, 2022.

Cash flow from operating activities during the nine months ended September 30, 2023 includes $40.0 million in insurance proceeds received from our directors and officers liability insurance related to the Cyber Incident. These proceeds were partially offset by the $26.0 million consolidated putative class action lawsuit settlement payment made during the period, along with other costs related to the Cyber Incident. In addition, cash flow from operating activities was impacted by a $28.7 million increase in cash paid for interest due to increases in interest rates partially due to the increase in applicable margins resulting from the refinancing of our debt in November 2022 and, to a lesser extent, an increase of $7.3 million in cash paid for income taxes.

Investing Activities

Investing cash flows consist primarily of cash used for acquisitions, purchases and maturities of investments, capital expenditures and purchases of intangible assets. Our capital expenditures primarily relate to purchases of computers, servers and equipment and leasehold improvements to support our domestic and international office locations. Purchases of intangible assets consist primarily of capitalized research and development costs.

Net cash provided by investing activities increased for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, primarily due to a decrease of purchases of short-term investments of $63.2 million and an

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increase of maturities of short-term investments of $11.5 million when comparing the periods. Additionally, the prior period included the acquisition of Monalytic, Inc., a monitoring, analytics and professional services company.

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 in the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to a $300.0 million voluntary principal repayment of debt under our First Lien Term Loan in the prior year and the reduction of our required quarterly principal repayments resulting from our debt refinancing in November 2022.

In the nine months ended September 30, 2023 and 2022, we withheld and retired shares of common stock to satisfy $14.7 million and $9.1 million, respectively, of statutory withholding tax requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees related to the settlement of restricted stock units during the period. These shares are treated as common stock repurchases in our condensed consolidated financial statements.

Contractual Obligations and Commitments

As of September 30, 2023, there have been no material changes in our contractual obligations and commitments as of December 31, 2022 that were disclosed in our Annual Report on Form 10-K.

During the nine months ended September 30, 2023, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in conformity with GAAP and require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates, and such estimates may change if the underlying conditions or assumptions change. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected, perhaps materially.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that these accounting policies requiring significant management judgment and estimates are critical to understanding our historical and future performance, as these policies relate to the more significant areas of our financial results. These critical accounting policies are:

•the valuation of goodwill, intangibles, long-lived assets and contingent consideration;

•revenue recognition;

•stock-based compensation;

•income taxes; and

•loss contingencies.

A full description of our critical accounting policies that involve significant management judgment appears in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 22, 2023. There have been no material changes to our critical accounting policies and estimates since that time.

Recent Accounting Pronouncements

See Note 2. Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, for a full description of recent accounting pronouncements, if any, which is incorporated herein by reference.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We had cash and cash equivalents of $232.2 million and $121.7 million at September 30, 2023 and December 31, 2022, respectively. We also had short-term investments classified as available-for-sale securities of $3.0 million and $27.1 million at September 30, 2023 and December 31, 2022, respectively. Our cash and cash equivalents consist of bank demand deposits, money market funds and investments with original maturities of three months or less. Our short-term investments consist primarily of corporate bonds and U.S. Treasury securities and other federal agency bonds. We hold cash and cash equivalents and short-term investments for working capital purposes. Our investments are made for capital preservation purposes, and we do not enter into investments for trading or speculative purposes.

We do not have material exposure to market risk with respect to our cash and cash equivalents, as these consist primarily of highly liquid investments purchased with original maturities of three months or less at September 30, 2023. We strive to maintain our cash deposits and invest in money market funds with multiple financial institutions of reputable credit and perform periodic evaluations of the relative credit standing of the financial institutions. We believe the financial institutions that hold our cash and cash equivalents are financially sound and minimal credit risk exists with respect to cash.

Our portfolio of available-for-sale securities classified as investments is subject to market risk due to changes in interest rates. Changes in interest rates could impact our future investment income, or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our investment securities as “available for sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.

We had total indebtedness with an outstanding principal balance of $1.24 billion and $1.25 billion as of September 30, 2023 and December 31, 2022, respectively. Borrowings outstanding under our credit agreement bear interest at variable rates equal to applicable margins plus specified base rates or a secured overnight financing rate (“SOFR”) with a 0% floor. As of September 30, 2023 and December 31, 2022, the annual rate on borrowings was 9.07% and 8.32%, respectively. If there was a hypothetical 100 basis point increase in interest rates, the annual impact to interest expense would be approximately $12.5 million. This hypothetical change in interest expense has been calculated based on the borrowings outstanding at December 31, 2022 and a 100 basis point per annum change in interest rate applied over a one-year period.

We do not have material exposure to fair value market risk with respect to our total long-term outstanding indebtedness which consists of $1.24 billion U.S. dollar term loans as of September 30, 2023, not subject to market pricing. See Note 6. Debt in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt.

Foreign Currency Exchange Risk

As a global company, we face exposure to adverse movements in foreign currency exchange rates. We primarily conduct business in the following locations: the United States, Europe, Canada, South America and Australia. This exposure is the result of selling in multiple currencies, growth in our international investments, additional headcount in foreign countries and operating in countries where the functional currency is the local currency. Specifically, our results of operations and cash flows are subject to fluctuations in the following currencies: the Euro, British Pound Sterling and Australian Dollar against the United States Dollar, or USD. These exposures may change over time as business practices evolve and economic conditions change, including as a result of the impact of the war in Ukraine, geopolitical tensions involving China, instability in the banking sector and financial services industry, inflation, or changes in interest rates on the global economy. Changes in foreign currency exchange rates have had and could continue to have an adverse impact on our financial results and cash flows.

Our condensed consolidated statements of operations are translated into USD at the average exchange rates in each applicable period. Our international revenue, operating expenses and significant balance sheet accounts denominated in currencies other than the USD primarily flow through our European subsidiaries, which have Euro functional currency. This results in a two-step currency exchange process wherein the currencies other than the Euro are first converted into the functional currency and then translated into USD for our consolidated financial statements. As an example, revenue for sales in Australia is translated from the Australian Dollar to the Euro and then into the USD.

Our statement of operations and balance sheet accounts are also impacted by the re-measurement of non-functional currency transactions such as intercompany loans, cash accounts held by our overseas subsidiaries, accounts receivable denominated in foreign currencies, deferred revenue and accounts payable denominated in foreign currencies.

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Foreign Currency Transaction Risk

Our foreign currency exposures typically arise from selling annual and multi-year maintenance contracts and subscriptions in multiple currencies, accounts receivable, intercompany transfer pricing arrangements and other intercompany transactions. Our foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on selected assets or liabilities without exposing us to additional risk associated with transactions that could be regarded as speculative.

We utilize purchased foreign currency forward contracts to minimize our foreign exchange exposure on certain foreign balance sheet positions denominated in currencies other than the Euro. We do not enter into any derivative financial instruments for trading or speculative purposes. Our objective in managing our exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in such exchange rates on our earnings and cash flow. The notional amounts and currencies underlying our foreign currency forward contracts will fluctuate period to period as they are principally dependent on the balances of the balance sheet positions that are denominated in currencies other than the Euro held by our global entities. There can be no assurance that our foreign currency hedging activities will substantially offset the impact of fluctuation in currency exchange rates on our results of operations and functional positions. As of September 30, 2023 and December 31, 2022, we did not have any forward contracts outstanding and while we do not have a formal policy to settle all derivatives prior to the end of each quarter, our current practice is to do so. The effect of derivative instruments on our condensed consolidated statements of operations was insignificant for the three and nine months ended September 30, 2023 and 2022.

We are exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments, but we do not expect any counterparties to fail to meet their obligations given their high credit ratings. In addition, we diversify this risk across several counterparties and actively monitor their ratings.

Foreign Currency Translation Risk

Fluctuations in foreign currencies impact the amount of total assets, liabilities, revenue, operating expenses and cash flows that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars. If there is a change in foreign currency exchange rates, the amounts of assets, liabilities, revenue, operating expenses and cash flows that we report in U.S. dollars for foreign subsidiaries that transact in international currencies may be higher or lower to what we would have reported using a constant currency rate. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions results in reduced assets, liabilities, revenue, operating expenses and cash flows for our international operations. Similarly, our assets, liabilities, revenue, operating expenses and cash flows will increase for our international operations if the U.S. dollar weakens against foreign currencies. The conversion of the foreign subsidiaries’ financial statements into U.S. dollars will also lead to remeasurement gains and losses recorded in income, or translation gains or losses that are recorded as a component of accumulated other comprehensive income (loss).

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

For a description of the lawsuits and government investigations or inquiries related to the Cyber Incident, see Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 9. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, which description is incorporated herein by reference.

In addition, from time to time, we have been and may be involved in various legal proceedings and claims arising in our ordinary course of business. Other than with respect to the Cyber Incident, neither we nor any of our subsidiaries is a party to, and none of our respective property is the subject of, any material legal proceeding. However, the outcome of legal proceedings and claims brought against us are subject to significant uncertainty. Therefore, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management’s expectations, our consolidated financial statements for a particular period could be materially adversely affected.

Item 1A. Risk Factors

With the exception of the following updated risk factor and the updated risk factors disclosed in Part II, Item 1A, under the heading “Risk Factors” in our Quarterly Report on Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023, there have been no other material changes in our risk factors from those disclosed in Part I, Item 1A, under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.

Risks Related to Our Technology, Cybersecurity and the Cyber Incident

As a result of the Cyber Incident, we are subject to pending litigation with the SEC, which could result in significant costs, penalties and expenses, the diversion of management’s attention, unfavorable publicity, a negative impact on employee morale and an adverse effect on our business, reputation, financial condition, results of operations and/or stock price, as well as a bar against our Chief Information Security Officer from serving as an officer or director of a publicly traded company.

On October 30, 2023, in connection with the previously disclosed SEC investigation related to the Cyber Incident, the SEC filed a civil complaint (the “SEC Complaint”) naming the Company and our Chief Information Security Officer (“CISO”) as defendants (the “Defendants”). The SEC Complaint alleges violations of certain provisions of the Securities Act and the Exchange Act by the Company and our CISO, and seeks, among other things, permanent injunctions from engaging in future violations of provisions of the federal securities laws at issue in the SEC Complaint, disgorgement of profits, civil penalties against the Defendants and an officer-and-director bar against our CISO.

The Company disputes the allegations made in the SEC Complaint and intends to defend itself in this matter. However, although the impact of the SEC Complaint, including the costs, timing, results and other potential consequences thereof, are unknown at this time, the filing of the SEC Complaint, any resulting litigation and/or an adverse resolution of the SEC Complaint could have a material impact on our reputation, business, financial condition, results of operation, cash flow, stock price, ability to obtain financing and/or the ability to attract or retain key employees.

Furthermore, regardless of the outcome of the SEC Complaint, the investigation by the SEC and resulting complaint itself has resulted, and will continue to result, in substantial costs, use of resources and diversion of the attention of management and other employees, which could adversely affect our business. Furthermore, publicity surrounding the SEC Complaint could have an adverse impact on our reputation, business, financial condition, results of operations or cash flows. We have incurred and will continue to incur legal and other expenses in connection with this matter and anticipate that we will be required to indemnify certain current and former officers with respect thereto. Moreover, we have exhausted our coverage limits under our applicable insurance policies and will therefore be required to cover such costs without insurance reimbursement.

Although we have resolved the other lawsuits in the U.S. related to the Cyber Incident to which we were a party, additional claims may be asserted by or on behalf of other government agencies, customers, stockholders or others seeking monetary damages or other relief. Any such lawsuits could result in the incurrence of additional significant costs and expenses, further diversion of management’s attention from the operation of our business and a negative impact on employee morale. The pendency or resolution, including any unfavorable outcome, of any such lawsuits, may result in additional costs and other liabilities, including providing indemnity to our officers and directors, and may have an adverse impact on our business, financial condition and results of operations.

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Item 6. Exhibits

EXHIBIT INDEX

Exhibit Number	Exhibit Title
3.1	Third Amended and Restated Certificate of Incorporation as currently in effect (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 10-Q (File No. 001-38711), filed with the Securities and Exchange Commission on November 27, 2018)
3.2	Certificate of Amendment to the Third Amended and Restated Certificate of Incorporation of SolarWinds Corporation (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 001-38711), filed with the Securities and Exchange Commission on July 26, 2021)
3.3	Amended and Restated Bylaws as currently in effect (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 10-Q (File No. 001-38711), filed with the Securities and Exchange Commission on November 27, 2018)
10.1	Contractor Agreement, effective as of November 15, 2023, between Rohini Kasturi and SolarWinds Worldwide, LLC (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-38711), filed with the Securities and Exchange Commission on August 30, 2023)
31.1*	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*	Interactive Data Files (formatted as Inline XBRL)
104*	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*

Filed herewith

**

The certifications attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q, are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing

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SOLARWINDS CORPORATION

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		SOLARWINDS CORPORATION
Dated:	November 8, 2023	By:	/s/ J. Barton Kalsu
			J. Barton Kalsu
			Chief Financial Officer
			(Principal Financial and Accounting Officer)

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