Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the solar wind fourth quarter 20, Nike earnings call.
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Actually hook. Thank you. Please go ahead ma'am.
It's really good afternoon, everyone and welcome to solar in fourth quarter 2019 earnings call with me today, or Kevin Thompson, our president and CEO and work out to our executive Vice President and CFO.
We prepared remarks from Kevin embark will have a brief question answer session. Please note that this call is being simultaneously webcast on our Investor relations website at Investor stuff.
Please remember that certain statements made during this call include including those concerning our financial outlook, our expectations regarding growth and profitability and our drivers of growth areas of our focus and investment expectations regarding collection and cash flow our market opportunities and market share and are in Asia.
Did you are forward looking statements. These statements are subject to a number of risks uncertainties and the assumption described in our SBC filings included.
Including the risk factors discussed in our form 10-K that was filed on February 20, that's 29 team and the form 10-K, we plan to file on March 2nd 2020.
Sure and he is these risks or uncertainties materialize or should any of our assumptions prove to be incorrect actual comedy results could differ materially and adversely from those anticipated in these forward looking statements. These statements are also based on currently available information and we undertake no duty to us.
This information except as required by law.
A cautionary statements regarding these forward looking thing.
Our further described in today's press release, unless otherwise noted all 2019 result will be discussed on today's call will include adjustments for the adoption of HSBC sensing and old 2018 financial measures discussed today will be presented on a stick to my.
Oh year over year comparisons will be impacted by these adjustments in 2019, unless otherwise noted that able to accompany today's press release include a presentation of the 2019 result on a six something interesting so far.
We will also provide our results and outlook for revenue growth rate on a constant currency basis to provide a framework for something or performance and how we expect her business from work excluding the effect of foreign currency fluctuations are used in calculations of these non-GAAP financial measures are further explain in today's press release.
Full reconciliations between each non-GAAP measure and corresponding GAAP measure is provided in the tables accompanying the press release, including adjustment for the impact of ask me six so sick. However, each non-GAAP item in our forward looking financial outlook that we provide today not been reconciled to the comparable GAAP outlook.
I am because providing projection of changes in individual balance sheet, an income statement a mouse, it's not possible without unreasonable effort and releases such reconciliations would imply an inappropriate degree a precision unless otherwise indicated references to profitability and comparable measures for purchase such measures on a non.
Yep.
With that I'll now turn the call over to Kevin.
Exactly.
First I would like to say that are forward looking comments on the fourth quarter call will be a bed shorter than what you come to expect from US given the fact, we had our analyst day back on December 11th in New York City, which many of you attended.
We shared a tremendous amount of information about the company at our growth strategy was out of it.
Not get a chance to 10 events the replay ever webcast as well the presentation or both available to stream and download from the IR section of our website.
I'm pleased to report when solid finish two successful year in 2019, Delevering fourth quarter 2019, non-GAAP total revenue on a constant currency basis, approximately $251 million, reflecting 13% year over year growth.
This resulted in full year 2019, non-GAAP total revenue on a constant currency basis, a mother and $51 million or 14% year over year growth.
Our fourth quarter non-GAAP total revenue performance was within the range of the out would we had previously provided.
However, subscription revenue growth, which is today and we'll continue to be in the future. The primary driver of our overall, referring came in above the high end of our outlook range when growth accelerating to its highest level in 2019, and 28% year over year growth I reported basis for the quarter.
We also finished the year on a very strong profit known as fourth quarter adjusted EBITDA totaled $123 million Werent adjusted EBITDA margin of over 49% hitting the high end of the rain or previously provided outlook for the quarter.
The strong finishing the year resulted in full year 2019, adjusted EBITDA of $454 million, an 11% growth compared to 2018, despite the dilutive impact the mid year 2019 to manage acquisition.
Our operating model has continued to show tremendous resilient as the business has grown and other revenue profile of the ball to be dominated by recurring revenue.
We had a number of operating and strategic highlights for the fourth quarter and the full year, but I'd like to make no doubt.
First we have quickly driven our business to 82% recurring revenue in 2019, that's covered 8% for 2018.
Recurring revenue on a non-GAAP basis grew by 15% of 2019 outpacing our total revenue growth for the year.
Non-GAAP subscription revenue, which was a small component of total revenue prior to our acute private in early 2016 ended 2019 on a constant currency basis, a $334 million, reflecting growth of 25% for the full year.
The fourth quarter totaled $90 million, increasing by 29% compared to the fourth quarter 2018.
We're pleased with accelerating growth we saw in revenue pro or cloud based subscription products, we expect to see a similar to slightly higher level of growth and the first quarter 2020.
The growth we attributed subscription bookings both organically and through products that we have acquired has also resulted in rapid growth of annual recurring revenue, which we define the annualized value of our maintenance contracts, hoping annualized value of our subscription agreements.
They are using 2019 was $845 million as compared to $710 million at the end of 2018.
Looking at increased 19% in an acceleration in year over year growth as compared to what we saw in 2018.
Subscription air or we just component I'm totally RR grew at an even more impressive rate of 31% in 2019, reaching $370 million at December 31st 2019.
During 2019, we also increased the number of large customer relationships, we have reaching a total of approximately 900 customers who have spent over $100000 without the last 12 month.
Which reflects 22% year over year growth.
We have done this well still driving strong new customer addition, adding over 25000 new customers in 2019.
Given the strength and breadth of our product portfolio.
The fact that our products are already deployed in a significant number of large enterprise, we see the opportunity to continue to build the number of large customer relationships, we have a double digit rate.
We believe the ability we have shown to build large customer relationships, while still maintaining velocity in our business is a unique characteristic of our go to market mop.
We believe our customer retention rates have continued to be among the best and software during 2019.
As demonstrated by our made this renewal rate for the full year coming in at or above 94% and the never take your rate on our subscription revenue stream, reaching 105% led by our MSP business, which delivering full year never take your rate of 108%.
We continue to be focused on driving our overall never taken right on description revenues above 110%.
Maintaining or maintenance renewal rates and the 92% 94% range for the long term I believe that these goals are achievable.
We're pleased with the full year growth in our non-GAAP license and maintenance revenue, which increased to $612 million in 2019.
Reflecting growth of 7% compared to 2018, which is within the range. The long term growth rates. We are focused on delivering this part of our business.
Based on the trends that I can infrastructure the strength of our product portfolio.
Okay and trust of our customer base and the reach of our go to market model. We believe at a rate of overall growth in sales for our core on premise deployed IP management portfolio in the range of our 2019 performance is sustainable for the long term.
We currently serve all 500 unfortunate 500 based on the 2018 Fortune 500 list and our toll direct customer count grew to over 320000 customer during 2019.
The total number companies, whose environments are being managed by silhouettes product either directly or indirectly or indirectly through one of our MSP partners has reached almost 850000 customers.
There are very few companies and enterprise software shown the ability to reach a group group of users whether product and go to market motions that is this large.
We also continue to expand our footprint and I see operations management during 2019 through the acquisition of to manage and the second quarter, We got an IP service management to our product portfolio.
Through the acquisition to different cortex late in the fourth quarter, we've completed our infrastructure it application management picture.
We now manage all key components of today's Harvard IP infrastructure, including the applications. It all key databases and those applications rely on in addition, providing technology provides for the tools to manage issues that are identified Bruce a resolution number and to improve the efficiency of their technical operations.
We believe that we've assembled a broad its coverage of modern Ikea restructured application environments.
I'm working.
Overall I'm pleased with the performance, we're seeing across our different product lines and geographic region.
We delivered a strong your performance in 2019, I believe we've positioned the company from an eye Tom market coverage and operating metrics perspective for another strong year in 2020.
With that I'll turn the call report who'll provide additional detailed and thoughts on our fourth quarter performance and will provide a detailed view of our outlook for the first quarter and full year 2020 [noise].
Thanks, Kevin Thanks, again to everyone joining us on todays call.
Fourth quarter financial results reflect another solid quarter with execution, while demonstrating the significant leverage that we haven't normal.
As Kevin indicated in his remarks, we were within the range of our previously provided outlet for the fourth quarter or non-GAAP total revenue.
Finishing the year with $249.4 million in revenue on reported basis or $251 million on a constant currency basis.
Just a year over year growth of approximately 13% on both reported and constant currency basis.
Fourth quarter non-GAAP total revenue growth was led by non-GAAP subscription revenue of 89.2 billion.
Which grew 28% year over year on reported basis, and 29% on a constant currency basis.
The growth in subscription revenue in the fourth quarter was driven by strong performance by our MSP business.
And a solid contribution from solar wind service desk or IP is important.
Non-GAAP license and maintenance revenue was $160.2 billion in the fourth quarter, increasing by 5% on reported basis and 6% on a constant currency basis.
Non-GAAP maintenance revenue was $115.6 million in the fourth quarter, reflecting growth of 9% on reported basis and 10% on a constant currency basis.
Driven by continued strong maintenance renewal bookings.
For the fourth quarter non-GAAP license revenue was $44.6 million, which represents a decline of approximately 3.5% as compared to the fourth quarter of 2018.
As Kevin indicated on our third quarter earnings call, we're driving the business to deliver license sales growth in the zero to 2% range on an annual basis.
While our full year license sales performance was within that range and we're pleased with that level of full year performance. The fourth quarter license sales performance was not as strong as we wanted it to be.
However, with that being said as we look at our fourth quarter license sales performance. We saw several highlights which include.
Our international we will utilize sales performance was much stronger in the fourth quarter of 2019 than it was in the third quarter of 2019.
This acceleration was driven by a meaningful level with improvement in license sales in EMEA as we saw operational improvement in market stabilization across the region and continued growth from Asia Pacific.
We expect to see at some level similar level of positive performance from our international business in 2020.
We also has several strong areas at North American license sales performance and growth in our fork in the fourth quarter that Unfortunately were offset by single weaker performance.
On the positive front, our new customer business and our state local federal and education businesses were strong in the fourth quarter delivering year over year growth.
In addition, we meaningfully grew that number or large customer relationships sequentially, reaching approximately 900 customers at the end of the year.
The majority this growth being driven by our North American customers. It seems.
Among these positive fourth quarter areas in North America, North American performance. There was one area of weakness that caused our global license sales in the fourth quarter to be lower than where we where we expected. This area weakness relates to execution issues in a portion of our north American install base sales teams.
We are actively addressing this issue and I'm already seeing meaningful level of improvement in performance.
Total non-GAAP revenue for the year ended December 31, 2019 was $938.5 million, which is a 20% increase over the prior year.
The prior year amount of $836.8 million on reported basis, and 14% on a constant currency basis.
For the year ended December 31, Decemberthirty, one 2019, non-GAAP subscription revenue was $326.7 million, which represents growth of 22% year over year and was $333.7 million on a constant currency basis, which represents growth of 25%.
The growth was led by our MSP business and from the solid contribution we got from solo and service desk Alright gets in products.
Our success at landing expanding and retaining subscription customers has translated into consistent growth of our customer relationships.
Subscription that retention rate for the year was 105% led by a 100% net retention rate for MSP business.
Non-GAAP license and maintenance revenue increased 7% year over year to $611.8 million for the full year.
Non-GAAP maintenance revenue grew at a rate of 10% reaching over $446 million. This growth was driven by very strong customer attention as evidenced by maintenance renewal rates for 2019 of 94%, which was at the high end to the range of performance. We have indicated investors should expect.
License revenue grew at approximately 5% year over year on reported basis, and approximately 1.5% on a constant currency basis.
Which is within the ranges due to 2% growth that we consider solid performance.
We also had a very strong quarter of non-GAAP profitability in the fourth quarter fourth quarter, adjusted EBITDA was $122.9 million, representing an adjusted EBITDA margin of 49.3%.
For the year ended December 30, Decemberthirty, one 2019, adjusted EBITDA was $453.6 million, representing an adjusted EBITDA margin of over 48%.
These results are despite the dilutive impact of this manage acquisition, which we closed in the second quarter. The combination of our revenue growth and profitability is still well above even the high industry standard as we ended 2019 with yet another year that parts is above our rule of 60 on these non-GAAP basis.
Unlevered free cash flow through the full year 2019 totaled 370 $372 million, which reflects a conversion rate of 82%.
Conversion rate, while very solid in the fourth quarter was slightly lower than we had anticipated as license bookings for the fourth quarter came in a bit later than our historical trend.
Resulted in a higher accounts receivable balance of approximately $13 million.
That we had expected heading into the year, which is reflected in our Dsos at December 31, 2019, a 45 days compared to an expectation of 40 days.
We expect to collect receivables in the first quarter, we should help our cash flow performance in Q1 2020.
In addition, cash taxes for the fourth quarter and as a result for the year were higher than originally forecasted by approximately $5 million.
Net leverage at December 31 was 3.9 times, our trailing 12 month, adjusted EBITDA, which reflects our ability to continue to do we de lever rapidly as our leverage ratio at the end of June 2019 was 4.2 times following the acquisition and to manage in the second.
Another recent highlight is the fact that we were upgraded by outside both S&P and Moody's and our most recent ratings review cycle. Both agencies cited our consistent performance strong cash flows as reasons for the up.
I will now walk you through our outlet before turning it over to Kevin for some final thought.
I will start with first quarter outlook and subsequently expand on the full year 2020 outlook that we gave you back in December.
For the first quarter of 2020, we expect non-GAAP revenue to be in the range of 243.5 million to $248.5 million representing year over year growth of 13% to 15%, which on a constant currency basis would be 40% to 60%.
Total non-GAAP license and maintenance revenue is projected to be in the range of 152 to 155 million.
Dollars representing year over year growth of approximately 5.5% to 7.5% on reported basis, and 6% to 8% on a constant currency basis.
Non-GAAP subscription revenue for the first quarter is expected to be in the range of $91.5 million to $93.5 million representing growth of 28% to 31% on reported basis or 29% to 32% on a constant currency basis.
Adjusted EBITDA for the first quarter is expected to be $108 million to $112 million consistent with our historical trend. We expect our adjusted EBITDA as a percentage of revenue to trend up over the course in 2020.
The year meaningfully higher than the Q1 levels as the dilutive impact of the acquisitions. We made in 2019 will become less impactful and as a result at the operational as a result operational efficiencies, which build as we move throughout the year.
Non-GAAP fully diluted earnings per share is projected to be 20% 21 cents per share assuming an estimated 313.6 million fully diluted shares outstanding.
Our outlook for the first quarter since a non-GAAP tax rate of 22%.
We expect to pay approximately $10 million in cash taxes during the first quarter 2020.
Last our first quarter outlook assumes the euro to dollar exchange rate U.S. dollar exchange rate of 1.11, and a pound the U.S. dollar exchange rate of 1.28.
Our outlook as it relates to the full year for 2020 is as follows.
Total non-GAAP revenue to be in the range of 1.35 billion to 1.055 billion representing growth of approximately 10.5% to 12.5% on a reported and constant currency basis.
Total non-GAAP license and maintenance revenue is expected to be in the range of 641 to 653 million.
Vision and growth of approximately 5% to 7% on a reported and constant currency basis.
This range assumes and maintenance renewal rate of 92% to 93%.
Non-GAAP subscription revenue is expected to be in the range of 394 to 402 million representing growth of approximately 21% to 23% on a reported and constant currency basis.
This assumes a range of net retention rate of 105% to 108% across our different subscription product line.
Adjusted EBITDA is expected to be 475 to 485 million.
As you think about adjusted EBITDA on a quarterly basis, we expect to exit 2020 at a meaningful meaningfully higher level of profitability than where we began the year. Our historical trend has ended the first quarter of the year is at a lower level of profitability due to several factors, including payroll taxes on yearend bonuses.
Higher levels of social taxes, and that we kick off our growth initiatives early this year with an expectation that those growth initiatives will begin to deliver results by the second half of the year.
We then expect our level of profitability to rise in December quarter, with a third and fourth quarter, delivering our highest levels of processes.
Non-GAAP fully diluted earnings per share is expected to be 88 to 91 cents per share assuming an estimated 317.2 million shares outstanding for 2000.
Our full year outlook like our first quarter outlook assumes a euro to US dollar exchange rate of 1.11, and a pound the U.S. dollar exchange rate of 1.28.
As we stated at analyst day, our long term goal is for the conversion rate of EBITDA to Unlevered free cash flow to grow slightly faster than revenue growth.
However, a conversion rate in 2020 will be negatively impacted by a few large onetime items.
This includes the major expansion of our Manila office as we believe it will be one of our fastest growing locations over the next several years as well as the diluted impact on cash flows in 2020 from our 2019 acquisitions of to manage and visit cortex.
In addition in 2020 like in 2019, we will have to continue to make additional total tax payments.
Which relate to our historical earnings outside the United thing.
These items will keep our conversion rate in 2020 in the mid 80% range.
Finally, due to our expected earnings and cash flow growth in 2020 net leverage absent any M&A activity will continue to decline and we will be approximately three times at the end of 24.
With that I'll now turn the call back over to Kevin for his closing remarks. Thank part as you can hear from our comments on this call and the comments, we made at our Investor and Analyst day in December we believe we position solar wind take advantage of both historical trend in deployment models and IP infrastructure in the on premises and data center market and for the current and.
Future trends and how hybrid hybrid IP infrastructure and application, we architected deployed unused.
This latest supported by several facts first according I'd say weve in the market leader in that were management for the last three years in our lead in this market is growing.
2019, we moved from the number for spot in Gartners IP operations management performance analysis software market rankings to the number three position, which reflects the success. We have had taking market share in systems that application management market as well the never management market.
We also believe we have positioned solar wind to be disruptive several fast growing part of the item marketing.
Namely Harvard IP infrastructure, and application management and IP service management.
Hybrid IP infrastructure and application market still early in its maturity cycle.
However, they understanding of the problem that need to be addressed in the way that technology pros Walton problems. We saw continued to be defined we have created a portfolio of easy to use and powerful product pricing disruptive levels, which we believe will enable us to begin taking meaningful market share from the early entrants into the hybrid IP infrastructure management market.
Who have already pivoted their go to market model focused on only large customers and only big deal.
This leaves a large portion of the market wide open for us hopefully.
We're confident that overtime, we will not only continue to be a meaningful player in the management of on premises and Harvard IP infrastructure and application, but also in the management Standalone cloud native infrastructure and applications.
Got you start with management market, we believe that the issues that IP teams need to be able to manage successfully are well under soon.
The company's all sizes are facing the same challenges.
We are currently focused on bringing the power of I'd assume the mid market in the small business with an intuitive easy to use product, we can deliver compelling price points.
Consistent with our approach last 20 years. However, we plan to improve settlements service desk with each new really adding capability and features that will also allow us to serve the I guess in needs of the entire mark.
We believe that Sullivan service that will be a long term growth driver for our business.
We also plan to continue into investing in a few market, where we had been a recognized leader from 2013.
We believe in the large opportunity in this market well before any other companies in size really understood.
But then year round of investment in MLP market over the last three years is becoming one of those hot new markets. There's not really knew at all we believe that we are well positioned abroad.
Most compelling set of products and MSC market to continue to be a leader and to take share in this market.
As we stated our at our Investor and Analyst Day, we're focused on building a business and the MLP market. We can grow subscription revenue at a sustained level of 20% or greater or the perceived foreseeable future.
Next I thought it would share a few additional comment on our M&A strategy as we move into a new decade and in fact, one of the third decade of solar wind history.
We believe that we have made M&A core competency of our business have Dennis demonstrated the ability to acquire companies or in some cases just acquire products.
Quickly adapt them to the settlement model driving revenue growth.
Hi level of profitability.
We will continue to aggressively look for opportunities to add capabilities to our product portfolios.
Customers are telling us that they need from us to allow them to manage their IP environment the way they want to manage them.
We will of course focused on being a disciplined acquire a company that technologies to ensure that we deliver a high rate of return on these investments.
Last turning specifically to our thoughts on 2020, we believe that we will deliver a solid year non-GAAP total revenue adjusted EBITDA growth in 2020.
Well at the same time investing in some of the fast growing parts of our business.
In solar wind to grow at a CAGR of at least 15% over the next five years.
We have entered 2020 from a position of strength.
With $845 million in Aerostar, which is 19% higher there, where we entered 2019 strong maintenance renewal and subscription that retention rates, which are at historically high level.
Oh and level of international momentum across all of our product line have a meaningfully increase the number of large customer relationships, we have while maintaining high velocity of new customer addition, which has been the hallmark.
Oil and model.
You can tell me outlook, we provided we expect to drive accelerated growth in our subscription revenue stream in 2020, driven by strong growth from our harvesting business.
Hello, and service desk, and our cloud infrastructure management products.
That will now open the call for questions.
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Withdraw your question press, the pound or hash key.
Please standby, we compile grew at a roster.
Your first question comes from the line of Sterling Auty JP Morgan.
Yes.
Well thanks, guys.
So maybe just.
On the license sales into the installed base North American you mentioned that you've already made some changes can you just feel that give us a little bit better clarity on what changes.
Made and how long you think it'll take some time default optimal productivity.
Sure. So bored indicated earlier, we had when are you really strong performance across most of North America in the quarter. We had good performance in EMEA with EMEA delivering growth again in the fourth quarter, which is great and Asia Pacific continuing delivered growth federal our new customer business state local and educational very strong in North America and.
Customer sales team is it really great across most of that team. We have one of our geographic region is just did not perform very well in the fourth quarter. When you made changes and approach we made changes in kind of way, we're managing that team to make sure that they're performing consistently with the rest of the business and I expect performance to be immediately.
Very strong January and customer by sales and we feel like we have already addressed the problem that we corrected the issues. We saw in the fourth quarter, we're already seeing improvement in performance in the first 30 days this year.
Got it.
Hello.
Listen to that first quarter guidance, how do you think about.
Organic versus inorganic acquisition contributions for the quarter.
Yes, if you look at kind of the third and fourth quarter I think as example, really the inorganic.
Impacted any material level is really driven by the smid acquisition was meant was made in the second quarter last year. So what you're seeing in Q3 Q4 is really what's continuing into Q1 and so to manage as Bob indicated his comment maybe I'd also performed well and then really contributed positively to our growth in the fourth quarter.
Acquisition is performing very consistent with our expectation right product great team right market opportunity continue to grow you at the rate that we said that it was back and we made that acquisition, which was in the 30% plus range. So that's really the only inorganic material contribution in 2020 that is built into our outlook.
Got it thank you.
Thanks early.
And your next question comes from the line of Brad Zelnick from Credit Suisse.
Great. Thanks, so much guys and it's great to see the momentum, especially in the subscription side of the business on that note. We were impressed recently to see that Kingdom showed up as a top 10, most popular developer tool in a recent report out from October if you guys had seen it but but how are other how or other products within the cloud.
Suite ramping Kevin can you give us a sense of how big paying them is versus the other solutions.
Yes, so we're talking about a few things. We've said, we have 40000 paying customers across our cloud infrastructure application management products, but they both those customers are relatively small in terms of their annual financial relationship with us.
Relationships are growing.
Paying them has by far the most users out of that total 40000.
Other product lines as a brand that incredibly well known as the brand is widely used by both.
When developers as well as part of development team.
But the if you look at you can go look at them at the website in pricing on paying them the pricing ranges from about.
So no Tonight I send them up to $349 a month. So you can see that the ASP is not very large. So this is as revenue stream in the double digits growing nicely, but it's not going to be the driver growth in that portfolio. The driver of growth will ultimately be up optics, which is our application infrastructure management product.
It's going be locally, which is our infrastructure log management product and then paper trail, which is our loan management product for developer Thats, where you can see more of the dollar growth user growth you're paying them is going to your does have an will always have a very large number of user so right product great brand awareness for us across.
The Dev off market in the cloud market.
Rating and has brought a lot of users to look at the other products than we have so it really great high volume profitable marketing is a great we think about it.
Excellent and if I could just follow up with a with a question on net retention not to completely rehash analyst day, but to make sure I've got my facts straight and again ask a question.
That follows a 105% net retention on the subscription business for 2019, which I if I'm not mistaken is at the bottom end of the 105% to 108% assumption embedded in your 2020 guidance, but you also talk about being able to get to over 110% eight can you just confirm that I've got it right.
And be the confidence in the motions that get you to 110% any optimism and things that you're already seeing that that should give us confidence that youre going to be able to get there.
Yes, so you're right, we're 105% for the full year 19 imply matter, where we've been 105% pretty much on a trailing 12 month basis, all year long across all of our subscription products.
But were 108% right now in our MSP business and then the net retention variety of them product is already above 110.
And we also recently added a database management Polyone has very high revenue today based on the characteristics of that buyer. We believe that product will have very very strong net retention and already does days above our 105 average and so when you look at the fact that Ravens P. net retention has been increasing over the last 12 months it was less.
108, 12 months ago said 108 now when you look at the fact that is one of the faster growing parts of our subscription revenue stream that idea sands already above 110%.
Is the fastest growing part of our subscription revenue product line right. Now those are the things that give us a lot of confidence that we can get above 110, well I've said I'd really like us and getting to the 112 115 range I, we have a path to one tenant we know what that that is that were audit and making really good progress to get to 110. Once we get the one thing when I'm done.
Then we're going to try to drive to between 1115.
And we actually do believe that's possible I, just don't have as much visibility to that as I do to 110. The other thing to note with the oil five was negatively impacted by.
In 2019, so it's more like one of six on a constant currency basis. So it's a little better than the oil fired. So we have a good path that were on and we got visibility through to one hit and we believe we know how to get from one hitting what the team and look at the ones in first and then we'll get it won't need 115 as one of my favorite latest sales leader used to say I got to sell a dollar to get to $2.
Well I got to get one hand in what gets one protein, but all the way. We think we can get beyond what can we still have much visibility yet in terms of how we get all the way there.
Awesome color. Thank you and thanks for all the other disclosure really appreciate the transparency.
Hi, Thanks.
Your next question comes from the line of Walter Pritchard from Citi.
Hi, Thanks, two questions one just on the.
On the incremental marketing spend even talking about over the last few months before the analyst day, and then a little bit of an up the analyst day can can you just update us on what sort of returns you're seeing there and then I had a follow up product question.
Yes. So we are seeing positive returns on that investment through the end of the year and you had indicated we have read have decent view by the end of December we'd have a better view kind of by the end of February given our average cycle time, we're seeing a positive return on that investment it's not at the level I'd like it to be yet so we're going to have to tweak it a little bit we are.
If we get a little bit in January in terms, how we're executing on some of those marketing campaign. So what I'd say is we're not at the point, where Barton I have said, okay. We're going to increase our marketing spend through 2018 through all 2020 last adult 18 of sit back and pass through all of 2020.
We're not to say, we're knocking on the level of return we want to see it is positive, but it's not positive.
ROI than we generally expect so we're going to keep tweaking it in terms of activity. The campaign, we're running in the first quarter when you're trying to drive that ROI up mobile we got built into our outlook is not an assumption will continue to spend at the level. We did in the fourth quarter. This is really specifically around our cloud infrastructure, an application management product. So we're not going to spend into that.
The 20 right now the level, we spent in the fourth quarter of 19.
In till we see a higher ROI than what we saw the fourth quarter. So positive. If we were probably any other software company. You know we would you know we've put a bucket of money in and dump. It doesnt out it's been like Crazy people, because we run our business at a high level discipline that and then that positive is not good enough. It's got to have an ROI leveled is better than just.
Make a little bit of profit on the dollar that I'd spend so we're going to tweak it a little bit. It works. It delivers more dollars revenue that it then and costs, but it's not where I wanted to be yet.
And then on the product side, Kevin Howard or any update as to how you're thinking about the security area and you've done some.
M&A work, there and so forth be curious any any update.
Yes, so we continue to to do a decent amount of work and security we added if you remember.
And advancing we've taken products, our MSP product offering.
2019, that's been incredibly well accepted by our MSP, that's one of the fastest growing products on percentage basis, we have right now.
With the product portfolio.
In 2009, Hany, we expected to continue to be a driver of growth in 2020, and so we've added capability. There we have expanded our what I'd like to call our infrastructure security infrastructure management capability 2019, with a couple of different products. We have one largely which is using some security use cases.
And we have a product called security of and manager, which is both a compliance product.
Lightweight Tim for companies, who don't have visitation of a wholesale and those products or youre performing well in the back half 2019, as I think about security out really like security that's tightly attached to infrastructure into the network. So why should you should expect from us.
We will either build and or look for opportunities to acquire.
Infrastructure security products, either the network level or at the server level, because thats, where the connection to the restaurant product portfolio creates the most value for our customers. So that we had space. We're going to can you expand and we're going to do it a little bit at a time like we did in 2019 make sure we really understand the market we understand the dynamics in the buyer Kelly behaving about.
Did that control.
How they want to engage with the product and hopefully make intelligent decisions about what we build and buy something we have the same kind of result, we have with his input protection product. We brought me with the market in 2019.
Great. Thank you.
Thank you.
And your next question comes from the line of Sangita Singh from Morgan Stanley.
Hey, guys is actually Keith Weiss sitting in for Firstenergy.
During this quarter, particularly on the subscription side, its really great to see the de acceleration, you're seeing there and the good traction and a lot of the incremental investments that you guys spin making through 2019.
Two questions kind of around that one.
On it just in terms of.
Understanding kind of the weaker license revenues.
How do you sort of parse out like.
License weakness coming from sort of more demand going towards subscriptions versus kind of license weakness overall why should this be kind of a more durable kind of trend going forward. If you will as more and more of the business.
Shifts towards the D.V. areas that are more cloud subscription focused number one and then number two you talked a little bit about within the MSP business.
Start to see some incremental or some increased competition in that space.
Guys had had a good idea upfront and have been.
You've done some some.
Competitors on building up a overtime can you talk to us just what that that environment looks like today and sort of how.
Youre competing to get sort of more msps on your platform.
And regarding the first question is it kind of relates to the opportunity for us continue to grow our on premise kind of led products. We today, we filled a license and we talked about at analyst day that we are going to at some point in 2020, and we don't have that day nailed down yet so working on and begin to offer those conference performance products all.
So as a subscription because we are beginning to seen some level demand by our on premise products that way.
We we delivered about 1.5% growth year over year on the called currency basis and license revenue. What we've consistently said is going anywhere between zero, 2% license growth on an annual basis is where we believe we can is level, which we believe we can perform and we think we can do that on a sustainable basis for the longer term.
We had really good growth across most of our sales team and most of our core on premise product in the year ended fourth quarter for that matter.
A little bit weakness on the customer on part of the customer based on in the fourth quarter, what I'd tell you, but I look at what's having an imperfect how things are happening without a doubt we seems on some small businesses.
Buying technology to manage environments and bells and began to ask MSP submitted those environments for them and that's something that we've built into our business model as we look forward and it's one of the reason why we don't expect 5% to 8% license growth is because we know a portion of that small business market and an increasing portion of that small business market is thrown up or has it that.
Can't do it myself anymore somebody do need the new informing which is why we've invested in the of as the market as heavily as we have and why we've got a really strong growth that we're seeing in that part and more on the market haven't same time, what we have seen is that there's a tremendous amount of technology still fully on premise and there is still new technology being deployed on Prem.
We think we're really well positioned from a product portfolio perspective to take share in that market because almost every other vendor that has any real focus on that market has reduced our level of focus reduce their level of investment either because they got acquired by companies are just harvests those take only for profit or because.
They simply don't have level profitability, they need to be able to invest in those areas and they're looking for areas that have higher easier growth, which is where a lot of big companies tend to turn when things get little bit nickel. So that market is still growing the number of competitors in that market is actually shrinking not growing the strength of those competitors.
It's actually been declining and we're seeing a lot of our.
Customers, who are large companies in some cases are also large customers of ours expanding the footprint other solwin's product portfolio in pretty dramatic ways, which is why we built as many large relationships as we have and we're still adding a lot of new customer. So a couple of things that it could happen as we look at 22020 through kind of.
2024, you're going to see us continue to build.
Adding an increasing number of large relationship with large customers that will started the ground level with initial very small transaction, but we're going to grow more rapidly in those accounts than we had historically there are many accounts, we've got large footprint already and but there's still an opportunity to increase those footprints and meaningful way and weve.
At Analyst day, we've added a new sales motion to our.
To our bag of sales motions I guess, you want to put it that way to allow us to more rapidly expand those relationship because we're having a lot of success and we really havent.
Intentionally tried to do that over the last five years, it's happening because our product our strong their deep or abroad and no. One else really is anymore and so those are the things that give us confidence that.
We're not say than license revenue going to grow at 10%, what we're saying that they're in the 2% range, which allows us to grow total license and maintenance on a combined basis in that 6% to 8% range, maybe 9% range is absolutely a level. We're comfortable saying we were if you were there in 2019, we fixed fee there.
2020, because of competition just not very strong.
Oh, you're MSP question that works is an interesting market today, yes. There is out there or is there a number of competitors in that market. There's really no one knew in that market of any size over the last five years. There has been a lot of investment into the companies that are in that market either by VC funded some of the smaller players.
Or by PE firms, who bought some of the larger players so theres not a lot of new strong competitors in that market.
There are a number of competitors in that market, where we've had an advantage where I think we're going to continue to have an advantage is the overall stream depth and breadth of the solar technology portfolio, none of the competitors in that space have the products. We've had for the last 20 years and the IP, we have the knowledge and know how we have a managing infrastructure.
Harvest wherever those infrastructure environment happens it nobody has the breadth of capabilities on their MSP platform that we have today. So as long as we continue to improve the products. We have as always we continue to bring the IP. We've had to the last 20 years bear on MLP market problem, we've accelerated the rate at which we're doing that.
We believe we're going to continue to be one of the leaders in that market and we able to deliver 20% plus growth, but really as far out as we can see.
Got it.
Super helpful. Thank you guys.
Okay.
Your next question comes from the line of Brent Thill from Jefferies.
Hi, This is love soda on for Brent So.
Just wanted to ask maybe peel, the onion back a little bit on the sales and marketing investments that to me this quarter.
Maybe could you talk about like the competitive environment, how what was it about those investments that didnt sort of live up to the expectations that you had in terms of returns.
Yes, So look I think it's a couple of things so what.
Thats a last quarter's call is because we're still relatively early in the maturity of that market.
There is a level the level demand that exists on the web while.
At a decent level is not so high that as you start as people start to spend more money trying to market to that demand you're seeing the rate.
The cost per click if you will go up at a pretty rapid pace. So one of the things we were trying to test.
As we deploy dollars what rate does that cost for Clayton go up what's the rate. It conversion, we get as their rate per dollar goes up because the reality of web based marketing.
As you push the volume limit as you push the dollar cost per click you will see some level of declining conversion, that's just math and so what we were trying to test is how the cost goes out was the conversion rate look like to opportunity and then what is that conversion rate look from it looked like opportunity.
To close deal so while we can spend those dollars profitably they don't meet my hurdle rate.
I have established in terms of what how many dollars revenue we want to get for every dollar marketing spend and you look at our historically, we spent about 25% to 27% of revenue with sales and marketing combined so we got a pretty high hurdle rate much higher hurdle rate than other companies have I absolutely do believe however that we can.
And drive demand even in that cloud restricted application management market.
The level of profitability that meets our hurdle rate and we can increase the level demand that we're driving increased array, which were adding new customers that part of our business and increase our growth rate. So we haven't lost any of our confidence in that we just haven't gotten to the math equation that we're bars that okay. Now get open up the default and give you more money you still got the bolt.
At this point waiting for them to prove to hill that they're good investment from take money on level. So we'll get there I'm not worried about our ability to to solve that math equation, we just insulting completely in the fourth quarter.
Got it and a quick follow for me.
In terms of.
Your progress on international markets I know, you're mentioning that next year you find too.
Yes open an office in Manila is that so how do you think about international growth and.
How should we think about it going forward and 2020. Thank you, yes, maybe clarify we had we had a big operation immaterial already well Bob indicated, we're really going to double down meaningfully increase the size of that operation because the point, we have a manila are truly phenomenal right attitudes incredibly committed to the company to an incredibly high.
The level of work and so it's really been a home run for us in terms of that operation. So we're planning to double down really double the size that operation over the next fall, but in order to do that we added more than double the size of the footprint. We have in terms of facilities in Manila.
Great relocation rose one that I am incredibly incredibly enthusiastic about.
And one that delivers tremendous amount of value to the company in terms of international growth. You indicated you. We saw good performance in the fourth quarter from EMEA. We saw continued good performance from a specific we're still focused on really cracking the code in the German market. We started investing that in the middle of 2019, we continue to invest in the German.
Market, we're seeing some improvement in performance in Germany, particularly in the fourth quarter, we're going to continue to push on that we believe that the market, where we should be much larger material grow much faster than even we are growing in the portfolio that we saw performance are going to push on that.
We're going to push hard this year to get our he is in product and to get our to continue to get our cloud infrastructure. It out because you manage our product really deployed into the international markets Europe first agents second those Roger mainly North American in term revenue stream and then we can mean, we talked about last year, we opened a Japanese office in.
Late 2019, we've got a small handful so I guess that's less than five.
Employees in Japan today, and we're beginning to see so positive traction from their efforts and so that was going to be as I've said slow burn, but ultimately will be a really good market for us. So that's how we're thinking about international right now.
Got it thank you guys.
Thank you.
And your next question comes from the line of Matt Hedberg from RBC capital markets.
Taking my questions.
I wanted to circle back on you know at Analyst Day, you talked about introducing a core I T subscriptions at some point in 2020, Kevin you. So there's really not a date, yet, but I guess Im wondering Bart how do you think about that when you offered the the 2020 outlook from a revenue perspective. It is I mean is it something that a you know as you say, you're selling more you'll sort of call it out and if it.
Don't have any cannibalistic effect, we note that I'm just curious on your thoughts on the guide.
Yes, so the Gotta gave for the first quarter as well as for the full year 2020 doesn't include any of the of the subscription story that we talked about at analyst day. Once again, it's not a subscription transition for us we're just going to offer our core IP products under a subscription pricing model.
We're going through the process.
But putting together the systems and all the other were behind the scenes in order to offer subscriptions. So in the quarter that Weve rule that out we will we will obviously adjust our guidance and talk about how that is going and how that's going to impact our income statement in terms of come from from a kind of business momentum perspective based.
All the work we've done the research we've done the hundreds of thousands of conversations we have a prospects and customers.
I do believe we're going to see some level of volume pickup, particularly at the lower end of our product lines, where our price point or not as competitive when you have to buy license as you can buy a subscription from some of our smaller competitors that small companies might look at small company worry about 5000, a proper cannot pay.
Hey.
$800, a year and they'll make decision to that level. So we do believe that is a smaller ball versions of our product we will see some level volume pick up once we get a subscription offering in the market. So you can choose one of my license. So what do I want to buy a subscription. So once we get to date nailed down we've got all work done we'll obviously.
New launch will announce that we're doing it and then we'll update our outlook.
Got it that's helpful and then.
In your prepared remarks, you Kevin you talked a lot about I talked a lot of investments last year and and I know you're pleased with the success. There you know that you had certainly the I kissed on product on your under your watch for for a couple of quarters. Now can you talk about maybe the competitive landscape are you surprised by who you are running up against maybe when rates just a little bit more detail there.
Yes, so we're running up against the kind of group companies, we thought we were running up against.
People, who would have kind of legacy I guess in products deployed so riveting.
Products like that from BMC and CA.
At HP and other so there's a bunch of old service that's product out there really are not modernity assume then we run up against.
No, it's really a customer design those products don't meet their needs anymore than need something much more modern much more is much easier to use there was something that is cloud deployed so they don't have the deployment or infrastructure. We're also seeing some of the competitors that are put a larger private players in the space. So companies like cherwell in fresh that refresh or whatever.
I got a lot of different fresh names as well, but because they have a little bit and then there's a bunch of cheaper cheerful service desk companies out there really that are hope that literally hundreds of them.
Because when we started our research or the space, we were actually shocked at the number of very small kind of one to 3 million revenue, maybe 5 million revenue companies that are out there that provide health desk. So there's a bunch of those out there were closed were prospects and customers are trying to side I just need to help desk or do I want to move to something that actually gives me much more functionality than that.
So that's how we run up against competitively I think the Midmarket and even the small enterprises pretty wide open from a competitive perspective, I don't like any of the competitors are.
Ticket fairly strong and they definitely don't have to go to market reach that we have they don't have the customer base. We have we're seeing a lot of interest by this'll with customer rate in our ideas in product, which we thought we'd see because now you can connect the operational man and the infrastructure management product that we provide you with operational management of your IP team.
And we can connect that look we are tightly than anyone else can so there somebody they've got some deployed in almost every case, but.
Your book as we believe we can we get when that business relatively easily we don't we're not running against American service now very often why because I'm not going that high in the market today. They are getting my comments really focus on the Midmarket small enterprise small business are really good for that level of company, if you're a large business who doesn't have really.
Like IP, we scaled to very large, but if you're really complex. We're not the right solution for you yet, but we will be so whether that 24 months from now or 30 months from now every release, we make we're going to be product will be stronger and stronger and we will get to the point over relatively short period of time, where we can compete.
The service now in some of those really large opportunities, but that's how we're doing today.
Got it thanks guys.
Your next question comes from the line up area.
Mr from Kay County.
Yes. Thanks for taking the question just a quick question on your larger customers can you talk a little bit about.
Kind of success, you've had with with 100000 200000 dollar a customers so volume that.
We generated at the end of the yet.
Sure. So I think one of that one of the trends we're seeing Eric is that we have a footprint and a lot of companies around the world. We've we've got to footprint in most of the large companies around the world with some volume is filled with technology deployed so footprint for small maybe about 15 or $20000 licenses. So those are for long.
Charge and maybe they bought half millionaire million dollars licenses, but they're very few organizations of any size anyway, where we are managing their entire environment. There. So but that's the state minority of our customer base and definitely what we've seen over the last 24 months because the trend has really been building in 2018 until the 19 really.
We dramatically increased the number of large customer relations we have over the last 24 month in the trend. We're seeing is those companies coming to us or using our products already in a certain areas or infrastructure coming out of it. Okay. We've got all these other legacy product Floyd, they're not meeting the needs we have anymore in order to give us a level of visibility we needed our infrastructure.
Sure, they're not dealing with the modern.
Architecture that these companies are creating and deploying we need you to be able to help us manage that and we want to go from a small or medium sized relationship very large relationships we bill.
You are really large number.
Significant relationships over the last 24 month and the level of activity. There's a level of interest is building, which is why you David talked about at analyst day. He created a new sales motion we put in place in January the brand new teams in place now handle rests on that team and that teams job is to go into those laws.
George customers, who have meaningful relationships with us where we know there's a much larger opportunity and try to accelerate the rate, which were capturing that large opportunity. So we'll be able to give a six month somebody ended the second quarter I think we're going to be able to talk about what kind of success. We're having with annual sales approach is still a typical silhouetted approach.
Selling Permian side, you still but it's much more proactive tonnage going into telling a bigger story, making sure. These organization no the breadth of our capabilities, which in many cases they don't.
And then showing of how rapidly that they can actually deliver values organization and the ROI. We can give them, which is you incredibly rapid because we're going to be generally less than the maintenance, they're paying for some of the older products that they've got employed by our licenses and then our maintenance onto would be much cheaper than the maintenance relationships. We have they have today. So.
A big opportunity and what we're really excited about because we're already seeing a very significant level success and we really haven't intentionally focused on driving that success until then.
I think you had a 238 customers at the end of Q3 can you update us what it was three in Q4.
So we had.
900 into Q4, and we had.
Little of 800 at the end of Q3's, we've been adding anywhere between kind of on a trailing 12 month basis weve, adding anywhere between kind of 50 to 70, a quarter that reached that level of spend with us.
Alright, very good thank you.
We're going to take one more question.
Okay. Your next question comes from the line of Heather Bellini from Goldman Sachs.
Thank you thanks, Kevin I'll I'll make it quick just wanted to follow up on the comments about the back end loaded quarter.
Just wondering in.
Any particular markets if you're seeing it was that mostly focused in the west where were you mentioned you had a couple of pockets of weakness or is it related to the UK, where I know you cited weakness in your Q3 quarter and then the second topic I just wanted to get your comment on its just the maintenance renewal rates, obviously been running.
Very high you at 97% in Q1, and it's slowly been ticking down I'm just wondering.
What caused the spike to 97% than in Q1, and what makes you feel like it's going to give to you I guess what gives you the sense to guide to a being 90 to 93. Thanks, yes.
Yes in terms of the linear area the fourth quarter, we definitely saw more business in the last 30 days the quarter than we typically have seen even in a fourth quarter fourth quarter is always more shifted toward the toward the back in our Dsos are simply run kind of 30 536 days every other quarter. They typically bounce up to 40 days in the fourth quarter.
Sure. So consistently we've seen more of the fourth quarter business come in at the last 30 days than other quarters in the year. However, this year in the fourth quarter, we definitely saw a little heavier loading in the fourth quarter, that's a little bit on the federal side. So you guys. Federal we had indicated you a federal sled, we had a strong fourth quarter.
And that doesn't tend to be a little bit less predictable in terms of timing, we saw more of that business come in late in the quarter and then on the North American side from a commercial perspective, we saw a little bit more coming in Europe was was not significantly less linear that historically has been into fourth quarter really nor nor were they get packs really more federal nor.
America as I indicated we're always we sell reversal that trade already this quarter, we had a strong January.
Which is much better than our October in terms of performance that expectation and what we'd expect linearity. So it feels a little bit like Joe fourth quarter blood, which.
Which is we're still more linear both companies and software I'm not getting 70% of a year in the fourth quarter and nitrogen in my fourth quarter in December but lets linear than what we've historically seen by you know about new tells about 30 million bookings. So thats, what Mark said, Hey are went up by so that's kind of the shipment linearity well. It makes renewals kind of took a couple things one yes.
What we've consistently said all year long is.
Based on 95, 96% 90 to 94 is where we believe it will be that's where we've trended historically over long periods of time that we were how should we were do we had really really strong made this rule performance in the first part of this year. The first quarter, we talked about the fact, we had a very very large federal renewal, which came in the first quarter, which.
Within our maintenance renewal rates in the first quarter and because we disclosed makes rollout renewal rate on a trailing 12 month basis that had some mathematical impact.
All the way through the year, we do believe that 90% to 94% as a run rates you expect.
We've got nothing to today for your percent baked into our view for 2020, we hopefully can do you are better than that and deliver that 94, maybe a little bit higher than that but anywhere between 90 to 94 reflected a really really good job and if we didnt downtick or higher we're doing a great job as we've got we've got.
We feel like we've gotten processes methodology the track record to.
Be able to deliver that not only do 90 forward who were the higher into that range, but that's really kind of what happened in 2019.
Thank you so much.
And with that operator, we're going to going to end the call for today. We appreciate everyone's attendance on the call and but the question if we got thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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