SolarWinds Announces Third Quarter 2020 Results

AUSTIN, Texas--(BUSINESS WIRE)--SolarWinds Corporation (NYSE: SWI), a leading provider of powerful and affordable IT management software, today reported results for its third quarter ended September 30, 2020.


On a GAAP basis:

  • Total revenue for the third quarter of $261.0 million, representing 8.5% growth on a reported basis.
  • Total recurring revenue for the third quarter of $221.7 million, representing 12.6% growth on a reported basis. Total recurring revenue includes:
    • Maintenance revenue for the third quarter of $121.1 million, representing 6.5% growth on a reported basis.
    • Subscription revenue for the third quarter of $100.6 million, representing 21.0% growth on a reported basis.
  • Net income for the third quarter of $12.5 million.

On a non-GAAP basis:

  • Non-GAAP total revenue for the third quarter of $261.3 million, representing 7.7% year-over-year growth on a reported basis and 6.5% year-over-year growth on a constant currency basis.
  • Non-GAAP total recurring revenue for the third quarter of $222.0 million, representing 11.5% year-over-year growth on a reported basis and 10.2% year-over-year growth on a constant currency basis. Non-GAAP total recurring revenue includes:
    • Non-GAAP maintenance revenue for the third quarter of $121.1 million, representing 6.5% year-over-year growth on a reported basis.
    • Non-GAAP subscription revenue for the third quarter of $100.9 million, representing 18.2% year-over-year growth on a reported basis.
  • Adjusted EBITDA for the third quarter of $132.7 million, representing a margin of 50.8% of non-GAAP total revenue.

For a reconciliation of our GAAP to non-GAAP results, please see the tables below.

“We delivered a strong performance in the third quarter of 2020 that included total non-GAAP revenue of $261 million, representing year-over-year growth of 8%, which exceeded the high end of our outlook range,” said Kevin Thompson, president and CEO, SolarWinds. “In the face of what has continued to be a volatile and uncertain economic environment, we continued to execute disciplined expense management, delivering an exceptional quarter of profitability generating $133 million of Adjusted EBITDA representing a margin of 51%. This year has shown us how critical the flexibility and resiliency of IT systems must be to support today’s modern businesses, which makes the work we do every day to support IT professionals as important as ever. We believe that the trend that we saw developing in the third quarter – CIOs and IT organizations aggressively looking for ways to reduce costs while still maintaining a depth of monitoring to ensure peak performance – gives us a strong opportunity to continue to capture share in our key markets.”

“The combination of our uniquely high level of profitability and focus on conversion of Adjusted EBITDA to free cash flow continued to pay dividends in the third quarter as our total cash balance reached $425 million dollars,” added Bart Kalsu, executive vice president and CFO, SolarWinds “ We converted approximately $108 million in unlevered free cash flow in the third quarter which puts our unlevered free cash for the first nine months of 2020 at $312 million and a year to date conversation rate of 86%. Additionally, our total non-GAAP recurring revenue grew 12% reaching $222 million dollars in the third quarter. Our non-GAAP recurring revenue included non-GAAP subscription revenue of $101 million dollars, reflecting year-over-year growth of 18%.”

Additional highlights for the third quarter of 2020 include:

  • During the quarter, SolarWinds’ commitment to customer success earned industry recognition from the 2020 Stevie Awards for outstanding customer service and support achievement. SolarWinds understands speed to value when troubleshooting fires and managing critical systems are of top importance for IT professionals driving business performance. The company won three awards in the 14th annual Stevie Awards for Sales & Customer Service, recognizing the worldwide achievements of sales, customer service, and call center professionals; one award in the Asia-Pacific Stevie Awards, recognizing outstanding achievements to all organizations in the 22 nations of the Asia-Pacific region; and one award in the German Stevie Awards, recognizing outstanding achievements to all organizations in the European nations where German is an official language.
  • SolarWinds announced a collaboration with Microsoft which will enhance monitoring and management for MSPs by integrating Microsoft 365™ capabilities with SolarWinds® N-Central and RMM. The integration is designed to deliver Microsoft Intune® device monitoring from within the SolarWinds dashboard, which means the majority of client devices can be managed from a single place, with the same configuration and alerting policies—strengthening data protection and streamlining efficiency. This integration builds on SolarWinds’ commitment to deliver an integrated ecosystem that MSP partners need, enabling them to offer more comprehensive service and protection for the myriad of devices they manage.
  • During the third quarter, SolarWinds also announced an expansion of its monitoring capabilities with the Cisco® Meraki® Marketplace to boost efficiencies for Meraki device monitoring, further building on the promise of a fully connected ecosystem. With this integration, MSP partners are now able to see the status of Cisco Meraki customers’ devices right in their SolarWinds N-central monitoring and management dashboard, enable notifications and alerts, and monitor connectivity and traffic—as well as conduct license warranty reporting, while leveraging the power of N-central to control, customize, and help secure complex environments.
  • SolarWinds announced in the third quarter it has joined the ServiceNow® Service Graph Connector Program, a new designation within the Technology Partner Program, by integrating its Orion Platform with Service Graph, helping customers to quickly, easily, and reliably load data from SolarWinds into ServiceNow – to realize better IT management outcomes. The new integration arms customers with the ability to automatically populate the Service Graph and CMDB with inventory discovered by SolarWinds Orion Platform products, schedule synchronization and reconciliation of asset data with Service Graph and CMDB, and build associations and stack relationships based on the discovered environment for faster root cause and impact analysis for outages.

Additional business highlights:

  • SolarWinds announced it has signed a definitive agreement to acquire SentryOne, a leading technology provider of database performance monitoring and DataOps solutions on SQL Server, Azure SQL Database, and the Microsoft Data Platform. Over the past 16 years, SentryOne has built a strong, well-respected product portfolio guided by a customer-centric model well-aligned to SolarWinds’ mission and commitment to the IT professional community. The SentryOne offering complements the on-premises and cloud-native database management offerings SolarWinds has today to serve the full needs of the mid-market and better serve larger organizations. The expected addition of the SentryOne products to the SolarWinds portfolio also will amplify the depth and breadth of support SolarWinds can offer for Microsoft and Microsoft Azure environments.

Additional details on the acquisition of SentryOne will be discussed on the conference call.

Balance Sheet

At September 30, 2020, total cash and cash equivalents were $425.0 million and total debt was $1.9 billion.

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

Financial Outlook

As of October 27, 2020, SolarWinds is providing its financial outlook for the fourth quarter of 2020 and full year 2020. The financial information below represents forward-looking non-GAAP financial information, including an estimate of non-GAAP revenue and revenue growth on a constant currency basis, adjusted EBITDA and non-GAAP diluted earnings per share. These non-GAAP financial measures exclude, among other items mentioned below, stock-based compensation expense and related employer-paid payroll taxes, amortization, the impact of purchase accounting from acquisitions, costs related to the exploration of a potential spin-off of SolarWinds’ MSP business and other costs related to non-recurring items. We have not reconciled our estimates of these non-GAAP financial measures to their most directly comparable GAAP measure as a result of uncertainty regarding, and the potential variability of, these excluded items in future periods. Accordingly, reconciliation is not available without unreasonable effort, although it is important to note that these excluded items could be material to our results computed in accordance with GAAP in future periods. Our reported results provide reconciliations of non-GAAP financial measures to their nearest GAAP equivalents.

Financial Outlook for Fourth Quarter of 2020

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

  • Non-GAAP total revenue in the range of $261.0 to $266.0 million, representing growth over the fourth quarter of 2019 non-GAAP total revenue of 5% to 7%, or 4% to 6% on a constant currency basis assuming the same average foreign currency exchange rates as those in the fourth quarter of 2019.
  • Adjusted EBITDA in the range of $123.0 to $126.0 million, representing approximately 47% of non-GAAP total revenue.
  • Non-GAAP diluted earnings per share of $0.25.
  • Weighted average outstanding diluted shares of approximately 317.5 million.

Financial Outlook for Full Year 2020

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

  • Non-GAAP total revenue in the range of $1.017 to $1.022 billion, representing growth over 2019 non-GAAP revenue of 8% to 9%, or 8% to 9% on a constant currency basis assuming the same average foreign currency exchange rates as those in 2019.
  • Adjusted EBITDA in the range of $486.0 to $489.0 million, representing approximately 48% of non-GAAP total revenue.
  • Non-GAAP diluted earnings per share of $0.98.
  • Weighted average outstanding diluted shares of approximately 315.5 million.

Additional details on the company's outlook as well as an update on the previously announced exploration of a potential spin-off of the company’s MSP business will be provided on the conference call.

Conference Call and Webcast

In conjunction with this announcement, SolarWinds will host a conference call today to discuss its financial results, business, business outlook and an update on the potential spin-off of its MSP business at 4:00 p.m. CT (5:00 p.m. ET/2:00 p.m. PT). A live webcast of the call and materials presented during the call will be available on the SolarWinds Investor Relations website at http://investors.solarwinds.com. A live dial-in will be available domestically at (833) 968-2238 and internationally at +1 (825) 312-2061. To access the live call, please dial in 5-10 minutes before the scheduled start time and enter the conference ID 8865708. A replay of the webcast will be available on a temporary basis shortly after the event on the SolarWinds Investor Relations website.

Forward-Looking Statements

This press release contains “forward-looking” statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial outlook for the fourth quarter of 2020 and full year 2020, our market share and our positioning in the current economic environment. These forward-looking statements are based on management's beliefs and assumptions and on information currently available to management. Forward-looking statements include all statements that are not historical facts and may be identified by terms such as “aim,” “anticipate,” “believe,” “can,” “could,” “seek,” “should,” “feel,” “expect,” “will,” “would,” “plan,” “intend,” “estimate,” “continue,” or similar expressions and the negatives of those terms. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the following: (a) the possibility that the global COVID-19 pandemic may adversely affect our business, results of operations and financial condition; (b) any of the following factors either generally or as a result of the impacts of the global COVID-19 pandemic on the global economy or on our business operations and financial condition or on the business operations and financial conditions of our customers, their end-customers and our prospective customers: (i) reductions in information technology spending or delays in purchasing decisions by our customers, their end-customers and our prospective customers, (ii) the inability to sell products to new customers or to sell additional products or upgrades to our existing customers, (iii) any decline in our renewal or net retention rates, (iv) 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, (v) the timing and adoption of new products, product upgrades or pricing model changes by SolarWinds or its competitors, (vi) potential foreign exchange gains and losses related to expenses and sales denominated in currencies other than the functional currency of an associated entity, (vii) risks associated with our international operations; (c) the possibility that our operating income could fluctuate and may decline as percentage of revenue as we make further expenditures to expand our operations in order to support additional growth in our business; (d) our inability to successfully identify, complete, and integrate acquisitions and manage our growth effectively; (e) our status as a controlled company; (f) risks related to the potential spin-off of our MSP business into a newly created and separately traded public company, including that the process of exploring the spin-off and potentially completing the spin-off could disrupt or adversely affect the consolidated or separate businesses, results of operations and financial condition, that the spin-off may not achieve some or all of any anticipated benefits with respect to either business, and that the spin-off may not be completed in accordance with our expected plans or anticipated timelines, or at all; and (g) such other risks and uncertainties described more fully in documents filed with or furnished to the Securities and Exchange Commission, including the risk factors discussed in our Annual Report on Form 10-K for the period ended December 31, 2019 filed on February 24, 2020, the Form 10-Q for the quarter ended March 31, 2020 filed on May 8, 2020, the Form 10-Q for the quarter ended June 30, 2020 filed on August 10, 2020 and the Form 10-Q for the quarter ended September 30, 2020 that SolarWinds anticipates filing on or before November 9, 2020. All information provided in this release is as of the date hereof and SolarWinds undertakes no duty to update this information except as required by law.

Non-GAAP Financial Measures

In addition to financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures to clarify and enhance our understanding, and aid in the period-to-period comparison, of our performance. We believe that these non-GAAP financial measures provide supplemental information that is meaningful when assessing our operating performance because they exclude the impact of certain amounts that our management and board of directors do not consider part of core operating results when assessing our operational performance, allocating resources, preparing annual budgets and determining compensation. Accordingly, these non-GAAP financial measures may provide insight to investors into the motivation and decision-making of management in operating the business.

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

There are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. Certain items that are excluded from these non-GAAP financial measures can have a material impact on operating and net income (loss).

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

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

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

Non-GAAP Cost of Revenue and Non-GAAP Operating Income. We provide non-GAAP cost of revenue and non-GAAP operating income and related non-GAAP margins using non-GAAP revenue as discussed above and excluding such items as the write-down of deferred revenue related to purchase accounting, amortization of acquired intangible assets, stock-based compensation expense and related employer-paid payroll taxes, acquisition and other costs, spin-off exploration costs and restructuring costs. Management believes these measures are useful for the following reasons:

  • Amortization of Acquired Intangible Assets. We provide non-GAAP information that excludes expenses related to purchased intangible assets associated with our acquisitions. We believe that eliminating this expense from our non-GAAP measures is useful to investors, because the amortization of acquired intangible assets can be inconsistent in amount and frequency and is significantly impacted by the timing and magnitude of our acquisition transactions, which also vary in frequency from period to period. Accordingly, we analyze the performance of our operations in each period without regard to such expenses.
  • Stock-Based Compensation Expense and Related Employer-paid Payroll Taxes. We provide non-GAAP information that excludes expenses related to stock-based compensation and related employer-paid payroll taxes. We believe that the exclusion of stock-based compensation expense provides for a better comparison of our operating results to prior periods and to our peer companies as the calculations of stock-based compensation vary from period to period and company to company due to different valuation methodologies, subjective assumptions and the variety of award types. Employer-paid payroll taxes on stock-based compensation is dependent on our stock price and the timing of the taxable events related to the equity awards, over which our management has little control, and does not correlate to the core operation of our business. Because of these unique characteristics of stock-based compensation and related employer-paid payroll taxes, management excludes these expenses when analyzing the organization’s business performance.
  • Acquisition and Other Costs. We exclude certain expense items resulting from our take private transaction in early 2016 and other acquisitions, such as legal, accounting and advisory fees, changes in fair value of contingent consideration, costs related to integrating the acquired businesses, deferred compensation, severance and retention expense. In addition, we exclude certain other costs including expense related to our offerings. We consider these adjustments, to some extent, to be unpredictable and dependent on a significant number of factors that are outside of our control. Furthermore, acquisitions result in operating expenses that would not otherwise have been incurred by us in the normal course of our organic business operations. We believe that providing these non-GAAP measures that exclude acquisition and other costs, allows users of our financial statements to better review and understand the historical and current results of our continuing operations, and also facilitates comparisons to our historical results and results of less acquisitive peer companies, both with and without such adjustments.
  • Spin-off Exploration Costs. We exclude certain expense items resulting from the exploration of a potential spin-off transaction of our MSP business into a newly created and separately traded public company. These costs include legal, accounting and advisory fees, implementation and integration costs, duplicative costs for subscriptions, employee and contractor costs and other incremental separation costs related to the potential spin-off of the MSP business.

Contacts

Investors:
Howard Ma
Phone: 512.498.6707
ir@solarwinds.com

Media:
Tiffany Nels
Phone: 512.682.9535
pr@solarwinds.com


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