Third Quarter 2018 Earnings Results

SolarWinds Announces Third Quarter 2018 Results

AUSTIN, Texas - November 13, 2018 - SolarWinds Corporation (NYSE: SWI), a leading provider of powerful and affordable IT management software, today reported results for its third quarter ended September 30, 2018.

Financial Results

   

Recent Business Highlights

“Our third quarter 2018 results illustrate the progress we have made in our business since going private in early 2016. Third quarter non-GAAP total revenue of $214.0 million, representing year-over-year growth of 12%, highlights the large scale we have achieved. Non-GAAP recurring revenue of $170.3 million grew 13% year-over-year and represented 80% of total non-GAAP revenue. This significant mix shift toward recurring revenue reflects the combination of the large, fast-growing subscription revenue stream we have built by addressing the needs of Managed Service Providers and the need to manage today’s hybrid IT environments - including public cloud - coupled with our high cash flow generating maintenance revenue base.

“And, as has been historically the case, we continue to invest in and deliver solid results through our on-premises network and systems management business. We believe it is our continued focus and commitment to this business has helped us secure the number one position in Network Management, according to IDC.1 According to Gartner, we have the number four position in Systems Management2, based on 2017 market share, worldwide,” said Kevin Thompson, SolarWinds’ President and Chief Executive Officer.

“In addition to increased revenue scale and visibility, we also operate more efficiently and generate more cash flow today than at the time of our take private transaction. Third quarter 2018 adjusted EBITDA of $106.5 million represents an adjusted EBITDA margin of 49.8% and showcases the efficiencies in our business and the work we have done as a private company to drive even greater levels of profitability, which translates into strong cash flow generation. For the first nine months of 2018, net cash provided by operating activities was $166.1 million and unlevered free cash flow of $259.7 million increased 18% year-over-year, representing 88% of year-to-date adjusted EBITDA,” added Bart Kalsu, SolarWinds' Executive Vice President and Chief Financial Officer.

Additional highlights include:

  • During the third quarter, SolarWinds made a number of updates and enhancements to its network and systems management, MSP and public cloud IT management product lines. The company also released new products that add depth and breadth to its IT infrastructure management products while also introducing new security capabilities to quickly position the company in the infrastructure security market:
    • SolarWinds released Log Manager, making enterprise class machine data analysis accessible to companies of all sizes with an easy to use product at a disruptive price point. Log Manager allows users to quickly and easily aggregate, search and chart log data. Plus, Log Manager is integrated with the Orion platform, providing users with a unified view of network and systems performance alongside the associated machine data.
    • SolarWinds also broadened its systems management capabilities with the release of SolarWinds Server Configuration Monitor (SCM). SCM allows users to proactively monitor and alert on system and application changes and correlate configuration changes to performance. SCM also integrates with the Orion platform.
    • SolarWinds MSP launched the latest version of SolarWinds N-Central with a wide range of features, including deeper PSA application integration, enhanced patch management, and NetPath. NetPath is a strong example of how SolarWinds is designing products and features that can be utilized across a wider set of product lines. NetPath was originally developed as a feature for one of its key network management products, SolarWinds Network Performance Monitor, and is an integrated offering on the MSP platform. NetPath is designed to help users troubleshoot network performance issues by providing deeper visibility into network paths, application response times, and node performance for on-premises, hybrid, and cloud environments.
    • In mid-Q3, SolarWinds added threat monitoring and management and entered the infrastructure security market. The new product, SolarWinds Threat Monitor, is an automated tool that is designed to reduce the complexity of threat detection for IT operations teams as well as for MSPs and MSSPs (Managed Security Service Providers). Threat Monitor can detect suspicious activity and malware by aggregating asset data, security events, host intrusion detection, network intrusion detection, and correlating that data with continuously updated threat intelligence, identifying the danger signals amidst all the innocent noise of a normal network.
    • SolarWinds also recently added user access rights management with the release of Access Rights Manager (ARM). ARM adds to SolarWinds’ new security capabilities with an affordable and easy to use product for automating user access management, analysis and enforcement through identification of insecure accounts while providing audit trails and the ability to quickly generate user access reports that make demonstrating regulatory compliance a snap.

Initial Public Offering

On October 23, 2018, SolarWinds Corporation successfully closed its initial public offering (IPO) of 25 million shares of common stock at a public offering price of $15.00 per share. SolarWinds received $353.0 million in net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses, from the IPO.

Balance Sheet

At September 30, 2018, total cash and cash equivalents were $278.3 million and total debt was $2.2 billion. Using net proceeds from the IPO, SolarWinds fully repaid the $315.0 million of debt outstanding under its second lien term loan. Assuming the completion of our IPO and the use of net proceeds from the IPO occurred on September 30, 2018, our total cash and cash equivalents would have been $302.1 million, total debt would have been $1.9 billion and net debt would have been $1.6 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 these non-GAAP financial measures is provided below under “Non-GAAP Financial Measures.”

Financial Outlook

As of November 13, 2018, SolarWinds is providing its financial outlook for the fourth quarter of 2018 and full year 2018. The financial information below represents forward-looking non-GAAP financial information, including an estimate of non-GAAP revenue, adjusted EBITDA, non-GAAP diluted earnings per share and non-GAAP weighted average outstanding diluted shares, for the fourth quarter of 2018 and for the full year 2018. These non-GAAP financial measures exclude, among other items mentioned below, the impact of purchase accounting, stock-based compensation expense, and costs related to non-recurring items and acquisitions. 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 2018

SolarWinds’ management currently expects to achieve the following results for the fourth quarter of 2018:

  • Total non-GAAP revenue in the range of $218.0 to $220.0 million, or 9.1% to 10.1% year-over-year growth.
  • Adjusted EBITDA in the range of $107.8 to $108.9 million, representing 49.4% to 49.5% of total non-GAAP revenue.
  • Non-GAAP diluted earnings per share on a pro forma basis of $0.17 to $0.18.
  • Non-GAAP weighted average outstanding diluted shares on a pro forma basis of approximately 320.5 million.

Financial Outlook for Full Year 2018

SolarWinds’ management currently expects to achieve the following results for the full year 2018:

  • Total non-GAAP revenue in the range of $833.2 to $835.2 million, or 12.4% to 12.7% year-over-year growth.
  • Adjusted EBITDA in the range of $403.5 to $404.6 million, representing 48.4% of total non-GAAP revenue.
  • Non-GAAP diluted earnings per share on a pro forma basis of $0.57 to $0.58.
  • Non-GAAP weighted average outstanding diluted shares on a pro forma basis of approximately 320.2 million.

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 and full year 2018, our growth expectations, our market opportunity, and our plans and strategies to grow our business and expand our market share. 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 inability to generate significant volumes of high quality sales leads from our digital marketing initiatives and convert such leads into new business at acceptable conversion rates; (b) the inability to sell products to new customers or to sell additional products or upgrades to our existing customers; (c) any decline in our renewal or net retention rates; (d) our inability to successfully identify, complete, and integrate acquisitions and manage our growth effectively; (e) risks associated with our international operations; (f) our status as a controlled company; (g) the possibility that general economic conditions or uncertainty cause information technology spending to be reduced or purchasing decisions to be delayed; (h) the timing and success of new product introductions and product upgrades by SolarWinds or its competitors; (i) the possibility that our operating income could fluctuate and may decline as percentage of revenue as we make further expenditures to expand our operations in order to support additional growth in our business; (j) potential foreign exchange gains and losses related to expenses and sales denominated in currencies other than the functional currency of an associated entity; and (k) such other risks and uncertainties described more fully in documents filed with or furnished to the Securities and Exchange Commission, including the risk factors discussed in our final prospectus dated October 18, 2018 and filed with the SEC on October 22, 2018 pursuant to Rule 424(b) of the Securities Act of 1933, as amended, and the Form 10-Q that SolarWinds anticipates filing on or before December 3, 2018. 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. Set forth in the first table below are the corresponding GAAP financial measures for each non-GAAP financial measure. Investors are encouraged to review the reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure included below.

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.

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. 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. 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 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, acquisition and Sponsor related costs and restructuring charges and other. 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. We provide non-GAAP information that excludes expenses related to stock-based compensation. 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. Because of these unique characteristics of stock-based compensation, management excludes these expenses when analyzing the organization’s business performance.
  • Acquisition and Sponsor Related Costs. We exclude certain expense items resulting from the Take Private and other acquisitions, such as legal, accounting and advisory fees, changes in fair value of contingent consideration, costs related to integrating the acquired businesses, deferred compensation, severance and retention expense. 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 Sponsor related 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 Charges and Other. We provide non-GAAP information that excludes restructuring charges such as severance and the estimated costs of exiting and terminating facility lease commitments, as they relate to our corporate restructuring and exit activities. These restructuring charges 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 charges 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.

Non-GAAP net income (loss) and non-GAAP net income (loss) per diluted share. We believe that the use of non-GAAP net income (loss) and non-GAAP net income (loss) per diluted share is helpful to our investors to clarify and enhance their understanding of past performance and future prospects. Non-GAAP net income (loss) is calculated as net income (loss) excluding the adjustments to non-GAAP revenue, non-GAAP cost of revenue and non-GAAP operating income and the income tax effect of the non-GAAP exclusions. We define non-GAAP net income (loss) per diluted share as non-GAAP net income (loss) divided by the non-GAAP weighted average outstanding common shares, which is calculated as if to reflect the conversion of Class A Common Stock and shares issued for accrued dividends, shares issued at our initial public offering and equity awards issued in connection with our initial public offering as if each occurred at the beginning of each respective period.

Adjusted EBITDA and Adjusted EBITDA Margin. We regularly monitor adjusted EBITDA and adjusted EBITDA margin, as it is a measure we use to assess our operating performance. We define adjusted EBITDA as net income or loss, excluding the impact of purchase accounting on total revenue, amortization of acquired intangible assets and developed technology, depreciation expense, stock-based compensation expense, restructuring and other charges, acquisition and Sponsor related costs, interest expense, net, debt extinguishment and refinancing costs, unrealized foreign currency (gains) losses, and income tax expense (benefit). We define adjusted EBITDA margin as adjusted EBITDA divided by non-GAAP revenue. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; adjusted EBITDA excludes the impact of the write-down of deferred revenue due to purchase accounting in connection with our acquisition, and therefore includes revenue that will never be recognized under GAAP; adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Unlevered Free Cash Flow. Unlevered free cash flow is a measure of our liquidity used by management to evaluate our business prior to the impact of our capital structure, purchases of property and equipment, acquisition and sponsor related costs, restructuring costs and other one time items, that can be used by us for strategic opportunities and strengthening our balance sheet. However, given our debt obligations, unlevered free cash flow does not represent residual cash flow available for discretionary expenses.

1 IDC defined Network Management Software functional market, IDC’s Worldwide Semiannual Software Tracker, October 2018.

2 Source: Gartner, Market Share Analysis: ITOM: Performance Analysis Software, Worldwide, 2017. July 9, 2018. (AIOps/ITIM/Other Monitoring Tools Software Market ). SolarWinds term, Systems Management, refers to the AIOps/ITIM/Other Monitoring Tools Software Market Taxonomy referenced in the Gartner report.

View Full Earnings Release Here

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

© 2018 SolarWinds Worldwide, LLC. All rights reserved.

CONTACTS:

Media:
Dave Hafner
Phone: 385.374.7059
ir@solarwinds.com
Investors:
Tiffany Nels
Phone: 512.682.9535
pr@solarwinds.com
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