Q2 2020 SolarWinds Corp Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the solar winds second quarter 2020 earnings call. At this time, all participants' lines or any listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you need to press star one all your telephone.

If you acquire any further assistance. Please press star zero, Oh, and I'll like to have the conference over to your speaker today, Mr. At Howard Mall Senior director of Investor Relations. Thank you. Please go ahead Sir.

Thank you operator, good afternoon, everyone welcome to solutions in second quarter 2020 earnings call with me there, Kevin Thompson, President and CEO and board calcium executive Vice President and Chief Financial Officer, following prepared remarks, and Kevin Barker well have a brief question and answer session. It's called being simultaneously webcast on our Investor Relations website <unk>.

Investors that solar winds dot com.

That's really just looks like you can also find earnings press release, a press release regarding the potential spin off of our MSP business and its summary, slide deck, which is intended to supplement our prepared remarks. During today's call. It provides a reconciliation of differences between GAAP and non-GAAP financial measures. Please remember that certain statements made during this call are forward looking statements.

Putting without limitation those concerning our financial outlook, our market opportunities the impact of the Cobiz 19 kinetic related global economic environment on her business and the potential spin off of our energy business into a newly created it separately traded public company and our pulmonary strategic operational and financial considerations related to potential spin off.

These statements are subject to a number of risks and uncertainties and could cause actual results to differ materially from those forward looking statements factors that could cause or contribute to such differences include but are not limited to numerous risks related to the potential spin off of our MSP business into a newly created it separately how did the public company, including that the processes.

Exploring the spin off and potentially completing the spin off the disrupt were adversely affected the consolidated were separate businesses results of operations and financial condition. That's been out would be not achieve some or all of any anticipated benefits with respect to either business and that the spinoff may not be completely in accordance with our expected plans were anticipated timeline or at all.

And the possibility that the global Cobot 19 pandemic, they adversely affect our business results of operations and financial condition.

In addition, we are currently exploring to spin off.

Not been approved by our board of directors and our statements with respect their to our <unk>. Our preliminary nature is subject to change as additional information becomes available as we consider and plan for the future strategic operational financial and capital objectives profiles and structures of the two businesses for more information. Please refer to the risk factors disgusting.

It's related press releases and our SEC filings, including our most recently filed form 10-K, and form 10-Q and form 10-Q for the second quarter 2020 that we plan to file by August 10 2020. These statements are also based on currently available information we undertake no duty to update this information except as required by law.

That's otherwise specified we will refer to non-GAAP financial measures on the call and references to profitability comparable measures refer to such measures on a non-GAAP basis. We will also provide a results and outlook for revenue growth rates on a constant currency basis to provide a framework for assessing our performance and how we expect our business performed excluding the effect of foreign.

Patients are using calculation of these non-GAAP measures are further explain to todays earnings press release and a full reconciliation between each non-GAAP measure its corresponding GAAP measure is provided in tables accompanying the press release and with that I'll now turn the call over to Kevin. Thanks Howard.

Hopefully all of you are aware at this point, we issued to press releases this afternoon.

One sharing the result of our second quarter in a second release, which discusses the fact that our board of directors has authorized management. This for a potential spin off of our MSP business into a newly created separately traded public company.

We believe that this transaction could be transformational and our ability to drive a higher level of future growth pharmacy business into will allow us to optimize the operating performance our core IP management business.

I'll first discuss the result of the second quarter and then we'll cover the spinoff opportunity where in Florida.

Overall, I'm very pleased with our performance in the second quarter, our global teams at the volatile and uncertain environment stride. They stay committed to our customers and partners success, while remaining focused on the outcomes, we're striving to achieve in the quarter.

Focused effort by our global team resulted in what we feel are very strong results for the second quarter. When total non-GAAP revenue raising approximately $248 million on a constant currency basis or $247 million on reported basis comfortably within the higher end of the range of our outlook for the quarter.

Reflecting 7% year over year growth on a reported basis.

Hey growth on a constant currency basis.

In addition, we delivered an outstanding quarter profitability generating over $119 million adjusted EBITDA meaningfully exceeding the high end of our outlook.

Second quarter was challenging businesses around the world grappled with the changing economic environment, and the resulting impact on their business performance.

As a result typing antech proud for less to deal with uncertainties around the amount of budget actually available.

And the approval process for committing that budget due to how rapidly the external environment and their individual internal approval processes were changing.

Given the volatility of the economic environment, the rhythm of the business just as uneven as we expected it would be when we entered the quarter variability by month and geography across the quarter.

Activity levels measured in terms of proud of our product quality conversations with customers in deal closing pace have improved since March. However, we still are not pre crisis levels.

To be at those levels before the end of the year.

May was a tough month of the quarter for us and was impacted by the significant slowdown in demand than we experienced in mid March. However, we then saw sequential improvement in performance in June across most product lines and geographic regions, which was consistent with our expectations based on the demand improvement we began to see in April.

Based on our interactions with thousands of technology pros during the second quarter, we saw an increase in budget pressure and heard from the technology pros that most of them expect additional budget pressures in the second half of the year.

This has been corroborated by several recently released CIO surveys, which have consistently indicated expected slowdown in IP spending over the remainder of 2020.

Despite the pressure Nike budget, our customer retention rates for the first six months of 2020 have remained remarkably stable due to the critical nature of our products.

In addition, personal or when there's a bright spot hiding inside of the budget pressures, we see in the market.

Our business was built to disrupt income monetize the market, which we choose enter through a combination products that are easy to try implemented you.

Pricing that most of our competitors are unable to match.

We will leverage these foundational aspects of our model to increase our market share in the IP management market. During this period of economic disruptions.

We had several operational highlights in the second quarter, though I want to briefly mentioned.

First as you should remember on April 21st we launched accretion pricing options for each of the key product in our Ryan family of networks system, The database management products.

In the difficult economic environment, we expected to subscription pricing launch will be favorably received it impacted was.

We have built a meaningful amount of subscription pipeline post launch and closed over 60 subscription transaction per se older product in our arrived product portfolio in the second quarter, which exceeded our estimates.

As a result, we've raised our expectation the dollar amount in volume or Ryan product portfolio subscription bookings for the remainder of the year.

Second we saw solid AOR growth in the second quarter will total air or reaching approximately $873 million as of June 30000 point.

Reflecting year over year growth of 10% on a reported basis and 11% on a constant currency basis.

Subscription great Hey, ARR grew at a meaningfully faster rate a 17% on reported basis, reaching $394 million at the ended the quarter and on a constant currency basis increased by 18%.

Third we have continued to see strong growth in the number of our large customer relationships illustrated by the number of customers who spent over $100000 with us.

Trailing 12 month basis, increasing on a year over year basis by 23% to 958 customers.

We see an evolving opportunity for us to strengthen our market leadership in the management on premise and hybrid infrastructure and applications, which represents the great majority Viking infrastructure applications deployed today.

Driven by budget pressures and a lack of strong options. We believe that we will see a wave of IP management vendor consolidation over the next several years and Selevend is well positioned to benefit from this way.

In fact, we're seeing this opportunity already and the second quarter, we closed the largest commercial transaction in our history with a global financial institutions.

This purchase significantly expanded their footprint solo and product across their global hybrid infrastructure and application environment and was driven by the value we have consistently deliver compared to the other large on T. management vendor is products they have been using.

Fourth as we've indicated previously we believe the database performance management is a large growth opportunity for us.

We have created deepest on premise native cloud and hybrid database performance management capabilities in the marketing.

Hi, David Management, 500 addressed the key relational and sequel databases in the market as well as the leading notes equal databases.

By many native cloud applications.

Ultimately, we believe in order to effectively manage the performance on premise cloud and hybrid application that technology pros month increase their visibility into database performance.

The second quarter, we tell our toll database performance management revenue grow by over 30% driven by this need for visibility across on premise, Dave cloud and hybrid database environment.

And finally, we were able to drive strong customer retention rates across our product portfolio during the second quarter.

With maintenance renewal rate of over 92%. The 12 month period ended June 30020.

We believe that our maintenance renewal rate will strengthen slightly as we move for the second half in 2020 based on the trends. We are currently thing.

And on the subscription side of our business. We're also seeing strong net retention rate. Despite the impact of the goaltending endemic with net retention rate of 105%. The 12 month ended June 32020.

With that I'll turn the call over to Bart who'll provide some additional details on our second quarter performance as well as our outlook for the third quarter in the full year.

Thanks, Kevin Thanks, again to everyone joining us on todays call before I begin my remarks from the second quarter results I went to update everyone on a few areas we talked about on our first quarter earnings call specifically related to the impact on our business at the economic slowdown caused by coded 19.

The two areas I thought as to touch on our liquidity and cash collection.

We ended the second quarter, we had $331 million of cash on hand. This is an increase of 94 million since March 31, and 158 million since December 31 2019.

We converted 95% of our adjusted EBITDA Unlevered free cash flow during the second quarter, which is an increase in conversion rate of 13 percentage points compared to the first quarter.

This sequential increase in conversion rate was due to strong cash collections in the second quarter.

Lower than expected tax payments and capital expenditures and lower bonus payments.

On the cash collection front, we had a very strong quarter of collections and our bad debt allowance returned to normal levels. Despite the difficult economic environment. In fact, our Dsos at June Thirtyth declined to 38 and a half days from 45 days at March 30, Onest 20 Twond.

Due to our strong cash collect cash flows in the second quarter, our net leverage dropped to 3.4 times trailing 12 month adjusted EBITDA at the end of the second quarter from 3.9 times at year end.

Moving to a discussing some of the details of our second quarter results.

During the second quarter, 86% of our total revenue was recurrent and recognize as either maintenance or subscription revenue.

Total non-GAAP recurring revenue for the second quarter grew at 11% reaching $213 million.

Second quarter recurring revenue growth was led by non-GAAP subscription revenue of 96 million, which grew 20% year over year and was $98 million on a constant currency basis for the second quarter, reflecting year over year growth of 21%.

The sequential decline in subscription revenue growth rate from the first quarter was primarily driven by the fact that we acquire some manage on April Thirtyth two 2019.

As Kevin indicated our total subscription net retention rate on a trailing 12 month basis for the second quarter held up at 105% consistent with the prior year quarter.

The net retention rate on our MSP products was 107% on a trailing 12 month reported basis and 108% on a constant currency basis, which was also consistent with the first quarter.

However, we did see some pressure on our customer expansion sales and an increase in soft churn during the second quarter as devices under management by our MSP customers fell slightly as Msps responded to the economic pressures being felt by their customers and focused on temporarily managing only the most business critical devices.

We have seen stronger to think expansion activity by our MSP partners. So far in the third quarter at device counts grew in July as an ASP increase the number of devices. They were managing for the customers back to more normal levels, resulting in sequentially stronger customer expansion sales and an improvement in top churn churn.

Total non-GAAP license and maintenance revenue in the second quarter grew modest modestly year over year, reaching $150.2 million on reported basis for the second quarter.

This growth was led by non-GAAP maintenance revenue, which increased by 5%, reaching $116.5 million on reported basis and grew by 6% on a constant currency basis.

Non-GAAP license revenue in the second quarter totaled $33.7 million, reflecting a year over year decrease of approximately 14%.

Our license sales.

Formant for the second quarter was within the range of or expectations. Despite subscription sales of our on premise based products exceeding our expectations for the quarter, which reduced the amount of license revenue recognized in the quarter by a little over 1%.

As Kevin indicated in his comments the rhythm of the business was uneven in the second quarter and this unevenness was most acutely felt in the sales of our network and systems management product.

Bookings declined year over year in the low single digits in April we are down more significantly in the month of May driven by weak demand in March and then rebounded this down low single digits in June which resulted in results for the first quarter that I just shared.

We believe that license sales performance should improve from our second quarter results in the second half of the year based on the improvement in trends, we have seen in our business in June and July.

However, we do continue to expect some year over year decline.

Part of this decline will result from the fact that Orion product portfolio subscription sales are expected to be a headwind to license revenue growth of 5% for the last six months of the year relative to selling only perpetual license license is based on our outlet.

However, the subscription pricing for Laurent Orion portfolio product is favorable over the long term as we currently expect a lifetime value of in a Ryan product portfolios subscription to be approximately 50% higher than its perpetual license and maintenance equivalent given our historically strong renewal rate through the Ryan product portfolio.

To be clear, we're not forcing any transition transition as to subscription sales, but rather offer it as an option to accommodate customer payment preferences.

We've had a very strong quarter of non-GAAP profitability and Unlevered free cash flow in the second quarter two.

Second quarter, adjusted EBITDA was $119.1 million, representing an adjusted EBITDA margin of 48% and year over year growth of 7%.

Which will increase of over three percentage three full percentage points of EBITDA margin from the first quarter was driven by disciplined expense management across our global business given the uncertainty of the economics of the economic environment.

And as previously mentioned, we generated approximately 113 million an unlevered free cash flow in the second quarter at a conversion rate of 95%, which puts our unlevered free cash flow for the six months ended June 32020 at 204 million.

And a year to date conversion rate of 89%.

Earnings per share on a non-GAAP basis for the second quarter totaled 25 cents per share based on 314.9 million fully diluted shares outstanding.

Turning to our outlet for the third quarter and full year 2020.

Our outlook assumes a euro to US dollar exchange rate of 1.15, and a British pound the U.S. dollar exchange rate of 1.27.

The net impact of foreign currency fluctuation is projected to continue to be a slight headwind to growth.

For the third quarter of 2020 on a non-GAAP basis.

We expect total revenue to be in the range of $254 million to $259 million representing year over year growth of 5% to 7% on a reported basis and 4% to 6% on a constant currency basis.

This third quarter outlook assumes a maintenance renewal rate in the 92% to 93% range and a third quarter net retention rate of 104% on a trailing 12 month basis.

Our adjusted EBITDA outlet for the third quarter is a range of 119 million to 122 million, which result in a range of earnings per share of approximately 24 cents per share for the third quarters, assuming the weighted average number of shares outstanding of approximately 316.3 billion.

Our earnings per share guidance assumes a non-GAAP effective tax rate for the third quarter 2020 of approximately 22%.

Now turning to our outlet for the full year of 22000.

For the full year ended December 30, Onest 2020 on a non-GAAP basis, we expect total revenue to be in the range of 1.008 to 1.018 billion representing year over year growth of seven 8% on a reported and constant currency basis.

The full year revenue outlook assumes a maintenance renewal rate in the 90% to 93% range and subscription net retention in the range of 104% to 105%.

Our adjusted EBITDA outlook for the full year is a range of 470 to 476 million, which resulted in earnings per share of 94 cents per share for the full year, assuming 315.5 million shares outstanding on a weighted average basis.

Our earnings per share guidance assumes a non-GAAP effective tax rate for the full year 2020 will be approximately 21%.

With that I'll now turn the call back over to Kevin.

It's hard to.

Quickly recap the key points, we've shared about our business on this call first we believe we're well positioned to take market share over the next several quarters in both the core IC management in NSP markets, leveraging our disruptive go to market approach as Ceos and MSP business owners looked over time, he spent while increasing the level of performance and availability.

Restructuring applications for which there responsible.

Second we have been positively surprised at a level of resilience and he's spending by small and medium sized businesses and in the MSC marketing.

Third based on the result of multiple independent surveys, which were released in the second quarter solutions is recognized by CIO as an important durability vintner due to the pervasiveness of the deployment of our technologies in managing the performance of critical infrastructure applications deployed on premise.

Fourth we see a large opportunity for solar wind and database performing performance management.

Driven by digital transformation in the move to hybrid and native cloud infrastructures as well as the recognition of any greater visibility into the performance of applications upon which the business realized.

In order to effectively manage the performance of application visibility into database performance as required we are focused on leveraging our strong based Davies management capabilities to ride the observe ability wave.

And finally, our products are critical to our customers' ability to ensure that the IP infrastructure and application. The run today businesses are performing the level required.

It has resulted in stable maintenance renewal rate and subscription retention rate during this difficult economic period.

Now I want to move to a more strategic conversation as it relates to the future silhouette.

As a management team and board of directors over the last several months, we've been considering the optimal structure the future success growth and value creation of the business that we have spent the last 20 years building.

We believe we have created two strong businesses inside of solar winds.

Our core IC management business and our MSP business.

That are each at different points on their growth curve in the maturity of the markets, which they serve.

We entered the managed service provider market in 2013.

Over the last seven years, we've built a large and rapidly growing SAP business, which we believe we'll approached $300 million in subscription revenue of 2020.

Based on the outlook for the year that Mark just provided.

Over the period, we have been in the MSP market, we have become one of the leading global provider technology through Msps, which has resulted in our MSP business, having grown at a CAGR of approximately 17% on a constant currency basis since January of 2018.

Importantly that business has also been designed to run a differentiated level of profitability for a SaaS business.

Let's begin the products that have been architected to run at high non-GAAP gross margins in a multi tiered growth model that is highly efficient.

We believe that we have created a broad technology portfolio. Among all competitors in this large a rapidly growing market, which according to various reports by independent analyst is projected to grow at a CAGR of up to 12% over the next three years.

However, we believe that the current growth rate of MSP market is even higher than these estimates as this market is still in its early stages of maturity with many MSP still using internally developed solutions had some parts of their customers infrastructures.

There are several future growth drivers famously market should result in a continued expansion of the total addressable market, which include expansion in the number of technology based services and MSP provides entering customers.

Increasing number of small and medium sized businesses turning to MSP help them manage their IP infrastructure at application environment, driven by the complexity of digital transformation.

The need for a broader and deeper level security protection premise based customers businesses.

An increase in the number devices that need to be manage for small businesses.

The foundation of solar wind has been our core I key management business upon which the company was founded over 20 years ago.

We have grown our core IC management business, while running at a very high level or profit every year for the last 20 years.

We are projecting this business will generate over $700 million in revenue in 2020 based on the outlook, which part provided.

Representing growth in the mid single single digits for the year.

Since January 2018, our core IC management business has grown at a CAGR of 10% has consistently run at a level of non-GAAP profitability, which has meaningfully higher than our company average.

Through our disruptive technology and go to market approach, we have reached to maintain for the last three years. The number one position of market share that we manage our privacy.

And are currently in the number three slot in the system that application management market for Gartner.

Based on the opportunities that we see for future growth profitability and return our board of directors has authorized management for a potential spin off of our MSP business into a newly created and separately traded public company and silhouette of exclusively focused on our core IP management business.

We believe the strategic rationale for the separation as compelling.

As a separation of the MSP business from solar wind will create two independent companies that are both market leaders each focused on their separate businesses customers and strategic initiatives.

The management and company focused generated by April separation could get our MSP business the opportunity to come a faster growth company to be more agile and drive faster more targeted innovation all for the benefit of our MSP partners, our employees and our shareholders.

Let's say the separation could also give our core I T management business the opportunity to focus on disrupting the mature parts of the ITC management markets, where it competes.

Focused on building products to meet the needs of the IP Technology program, which has served for the last 20 years and optimize its high profit margin operating model.

As a potential separation, we would expect each business to have a state capital structure approach appropriate for each of these businesses maturity growth and profit level.

The manual spin off May also enable shareholders more clearly evaluate each company's assets operations and future potential.

While allowing both companies to independently pursue their distinct business strategies and capital allocation policy.

Please note that were in the early stages the exploration of the initial set up with so many details of the table spin off work in process, we will not be able to provide any details on the peso separation.

Discussed on this call. We are however committed to updating you in the future.

I'll now provide some specific thoughts we have as it relates to the opportunities we see pharmacy business.

And our chloride team management business.

With respect our MSP business, we believe that additional focus on an investment in our MSP business may be able to accelerated revenue growth, while still providing a differentiated level of profitability.

As a part of solar wind the level of investment in our MSP business has been constrained given our overall focused on driving a defined level profitability on a consolidated basis and a requirement allocate resources across a large global company.

We believe as a Standalone company, we increased the level of investment in growth initiatives, which include increasing the rate, which we are bringing new technology based services market to meet the needs of our midstream partners and their end customers.

Expanding our global Salesforce.

And creating new product pricing and packaging options.

We believe these initiatives could drive future revenue growth above 20% over time.

In addition, as a focus Standalone company, we feel we'd be able to more effectively attract and retain world class talent in the MSP business.

We also believe there's an opportunity for our MSP business to acquire companies and technologies will be accretive to its growth strategy. We may that we may have not considered with MSP business being part of the much larger consolidated business. This silhouette.

The current expectation is that the MSP business would be a growth focused business.

However, its operating mall has been designed to allow for a meaningful a differentiated level of profit and cash flow generation compared to other similar scale SaaS business.

We believe that the appropriate capital structure for this business may include a modest level of leverage in line with software and technology peers have similar scale.

With a focus primarily on reinvesting profits to drive long term growth.

We are early in our planning the based on the long term growth opportunities and the operating leverage we have built into our MSP business. We estimate that this business could run at a level approaching the rule of 15 as a Standalone company.

Our core Iraqi management business at the highly recurring revenue business designed to deliver a unique level of profitability and cash flow focus on solving the performance management challenges of corporate idea Dev ops as well the IP organizations have many government bodies around the world.

This is a bit architected to allow us to inner well established markets disrupt them for our unique technology development and go to market approach and we've been working to perfect over the last 20 years.

Based on the successes, we have already had we believe there's an opportunity to further disrupt the lottery management market through a dedicated focus on a slightly our competitors inside of our existing enterprise customer accounts.

In order to successfully attack this opportunity the car T management business may benefit from being able to explore new go to market approaches to identify and when the displacement opportunities.

In addition, as we've stated previously we believe in IP infrastructure and applications.

We'll be predominantly architected and deployed and a hybrid model in the future.

We feel we have the right set of product capability to address hybrid IP with the ability to provide visibility or observe ability as it is referred to today into the performance of all key component by key infrastructure and applications, including those on premise in the public cloud and hybrid environments. However, we also see an opportunity to combine.

As broad set of capabilities into a SaaS platform and unique and differentiated ways as compared to other observe ability vendors in the market, which will allow our current and potential customers choose how they want to manage their hybridizing environments.

Last a tremendous operating leverage we have built into our core I see management business allows us to generate a high level of profit and cash flow, which we believe we can further optimize while still delivering low to mid single digits future revenue growth.

If we proceed with the Pinnacle spinoff transaction, we believe that solar winds could have a highly differentiated level of profitability at scale within enterprise software.

While delivering future revenue growth in low to mid single digits, which will potentially allow this business to run well above the rule 15, while presenting an attractive levered free cash flow growth story.

This office optimization may provide us the opportunity to create incremental shareholder value for our core IC management business by incorporating an investor capital return program.

Whereby this business could pay special dividend concurrent with the potential transaction.

And distribute a substantial portion of its future profit to shareholders in the form of an annual dividend as a component of our future value creation strategy.

Further we would expect the solace quality management business to continue to support a meaningful amount of leverage likely increasing above current levels given its strong cash flow generation and then leverage three uses for the future growth of the business and the potential capital return program.

We plan to share additional details on the potential capital return strategy.

Today, we are further exploration process.

The last time I will address relates to how we're thinking about future leadership, if we move forward with a tangible spinoff.

As it relates to our MSP business, we have a talented management team led by the GDP and president of SOLANS MSP John Pelusi.

Which has tremendous experienced an MSP markets.

As our current view for the potential transaction go forward and John We continue to run run the MSP business as CEO.

John has been a valuable member of the slow as executive team for the last four years in his role as leader Sullivan domestically.

Delivering strong growth in both revenues and profitability and is a long term veteran of MSP marketing.

Joe enjoying solar wind as a result, our acquisition lighting now may 2016, a high growth business, we acquired to accelerate our penetration in MSP marketing.

Prior to joining joining solar when John with Pete Chief Financial Officer for logic now.

The silhouettes core IP management business part of our exploratory process will be finalized the future leadership structure.

For solar winds.

Just to clarify 14th year teller, when the second quarter 2020 represents by 56 quarters. The company my 42nd quarter as CEO.

Got to sell the when the company had approximately 20 employees, who were based out of a small building in Tulsa, Oklahoma.

Today, we have over 3200 employees and 40 locations in 19 countries in the 2020 outlook. The bar provided indicate we may reach the $1 billion an annual revenue threshold in 2020, which is all of you know is still rare for pure software company.

I'll leave the time is now approaching for me to allow the deep and talented group of executives, who run our core IC management business.

Many of whom have been with me for most my tenure at solar wind have been outstanding partnered with me and building solar wind and integrate company. It is today to carry a leadership with solar wind and in the future.

This team, which includes our CFO bar calcium is obviously with me on this call and David Garner the GDP, President and COO of our core I see management business is ready and more than capable as they have been the primary reason, we've been able to create such a uniquely successful business together over the last 14 years.

I will continue to lead teller wind over the near term as we make the decision on the spin off as we conduct an external and internal search process for a CEO, who will be solar wind in the future.

As you all know I've been very passionate about the opportunity we have to build a great company.

Committed to this company that people investors and other stakeholders for a long time.

Can you give me confidence I will do whatever is in my power to ensure that we have a seamless leadership transition.

To the wonderful group was hilarious, who I know are listening to this call today.

Well I'm not quite done with my time at solar winds yet.

I do want to take this opportunity to tell all of you I'm honored to do let me leave you for the last 14 years.

The trust, replacing me level passion and commitment you have consistently exhibited to making solutions are great company and the way you care about the people in the communities where you are located it's really only.

Thank you for the experience I would not traded for anything else in the world.

What we have accomplished I will always be extremely proud as together, we have created the best story and software.

The best Davis silhouettes are still in front of us say passionate say aggressive and be unafraid to take risks with that we'll open up the call for questions.

And as a reminder, fuel let's ask a question you need to press star one or your telephone.

And your first question comes from the line of Brad Zelnick with credit Suisse.

Great. Thank you so much for taking my my questions.

Kevin The news and shared with US today is both surprising and very excited at the same time.

And it's good to see that the management team at the board are really focused on shareholder value creation.

As we think about the potential spin off of the MSP business I imagine you reached a threshold in this process, which you are legally required to disclose this to everybody can you just outline for us what are the key decision points.

That are left here and what remains of the process at this point.

Brad we're still actually relatively early in the exploration process. The reality is there was a lot of work for us to do both operationally to understand how we would split these two businesses part likely we run a business unit format today and MSP business as one business unit quite the management businesses. The second business unit, but we are we're early in his.

A lot of work to do to determine exactly what the market opportunity. It looks like to ensure that we will create the right level value, but really the whole Genesis of it is we believe we can grow MSP business faster there were growing today. We believe we can optimize performance in the core I'd management visits hopefully that should create a greater level shareholder.

Value, but it's really about taking these really two great businesses, we created and given them a little bit of freedom really taking any constraints that are on them.

Off the reason we've disclosed it today is because there was a lot of work to do.

And because we have got need to evolve a larger number of the member of my team a very small number of people that involved in this so far.

We've disclosed it because that information will begin the lake out into the market.

The moment, we expanded that circle beyond the very small group of people to report directly to me. So our management team very excited about this opportunity we really had been the drivers of the decision to.

Explore this potential transaction and winning but if I can tell convincing our board. It was the right thing to do as it were disclosing it. So we can work as fast as we can and not have to try to keep a secret which as you know as always hard to do.

I get it makes perfect sense it and as you described to you you're going from a rule of 50 company to rule of 50 companies I know that doesn't add up to the rule of 100.

Or is it really shift.

Yes.

That nobody else does one I got to.

[laughter].

But can you just remind us in terms of dis synergies the extent to which you have shared R&D shared products.

Sure sure marketing.

Even even down to DNA functions and I know, it's early in the process, but how should we can you can put some numbers to that how we might think about it.

Yes, so can we put numbers to admitted in broad strokes from an operating go to market R&D perspective, we have built the business where.

Those costs are specifically aligned and charge to if you will continue to work to the different business unit, where we have shared.

Functions are financed.

Legal IC Dev ops little build a corporate marketing search side, where we got a lot of expertise we have brought into a shared functions. So.

On the MSP side of the business will definitely have to move some of those team members and though shared services into that business. So as team members will end up in the core I see management business nemesis pivot as rose at a high level contribution margin today that will drop a little bit as they move into a separate business, but also.

So we really want to invest in growth, we think that business can grow as I've said at a rate above 20% over the longer over the longer term.

And with investment we are we're pretty confident we can get there. So would that we will invest on the of a fee side by optimizing the core I see management business and really allowing that business to do what it does incredibly well, which is monetize and disrupt mature markets don't go into markets too early when do those markets are really well understood wait until they're big wait until everyone knows why.

They want to spend money and then we will kind of move in and disrupt which is how we've built that business.

But we've been a little earlier to markets over the last several years and I think this will give us the ability a little more patient and do what we do incredibly well in fact, what we think we do better than anyone else and technology.

Fantastic. Thank you so much Kevin that's another big Brad.

Your next question comes from the line Sangita Singh with Morgan Stanley.

Hi, This is Melissa done on true Sanjay Thanks for taking the question.

So hoping to get a little more color as it relates key subscription revenue piece of business within that the cloud management piece, how big is that today and we did get a little more on how it's been trending over the last year.

We've seen any signs and how that pieces ramping.

Yes, so we haven't simply talked about the size of the cloud management business, we shared a couple numbers.

On the call today, which is you have to their MSP business. We believe will approach 300 million insufficient revenue in 2020, the rest of the subscription revenue. We have is part our core team management business.

And inside of that core Humana business, we have cloud management, we have IP, assuming we have database performance management that we sell description and we're beginning to sell our core our Ryan product portfolio as a subscription. So all of that is comprised of the rest of the subscription revenue that the company has.

From a cloud management perspective, when you take that does that get them product that David performance management products that are delivered.

Via service when you take the application management infrastructure management log management products, we have.

Those products are growing nicely an important part of our go forward story.

Some of those product kind of fit into that category that I mentioned wireless entered Brad's question, which is we're a little early in some of those markets and I've said that many times publicly I think if we move forward. This with this potential spinoff transaction it will allow us to.

The more effective which had with how we attack those market that we allow them to mature while we take advantage is a big opportunity. We see an enterprise software, where we are beginning to win a number of large deals displacing some of the older competitors Nic management is still at large deployments in on premise and hybrid environments. We believe we are absolutely the best.

Under four IP pros and see how is to consolidate around on premise, so thats, where our focus will be.

Helpful. Thank you.

Up.

Your next question comes from the line of current.

Let's turn with Evercore ISI.

Thanks, very much and Kevin I know, you're not going anywhere, but congrats on a on a great. Ron I think I remember when you first headed down there from Raleigh, So spin rational now and it's been a long time, so again, congrats on they're not going anywhere, but I'd say that.

When you talk about sort of optimizing the IP business in sort of going after clients that you're trying to displace competitors are the things that you think you can do better as a standalone business, meaning are there things you can do from a discounting perspective.

You mentioned sort of having some new go to market functions around that which knowing your sort of.

Religion towards your go to market model, it's kind of curious view explain a little bit more on that so just kind of curious can you do more on discounting is there way to get into those sort of this installed base accounts, a little bit more effectively than how you're doing it today I, just maybe a little bit more detail and that would be helpful.

Sure so.

It comes down to kind of from the first perspective, I know the level of focus that we're going to be able to put assuming that this type of transaction. The forward quietly management business will really be able to focus on just that right. When you read a large global business you have multiple business units you're right in your costly making decisions on priority and this will make those decision.

Very very clear according to management business will have a number one priority to grow that business and is not a matter of sharing rate sharing resources across a larger business. So thats really to the number one advantage. We've again from a go to market perspective, we are seeing and we're having success. We mentioned we closed a large commercial deal in our history with a large global financial.

Institution in the second quarter and its example of what we can do we have a very broad technology said, we have more and better talking that technology. We believe it really anybody in the market to manage on premise environment hybrid environments. Today Theres a lot of companies out there their customer of ours. They also are customers of our competitors and were begin.

And to see a lot of success and taking those customers away from our competitors because our competitors are really can't respond their technology is not as modern it's not a broadest deepen their pricing is much higher than our so what we believe we can do is with a dedicated focus on that opportunity create a solar wind style approach as we don't sale like anyone else and we never will.

I will create a solar wind style approach for how you go in and you displaced those competitors and the good thing is it's not a which we're doing it already what we're doing it now without specific focus on that opportunity. We have one enough deals like that over the last couple of years than we can see the size the opportunity we.

No we can win until its figured out how do you market to identify those displacement opportunities what are the conversations we train our sales reps to have to be able to to move those displacement opportunities forward, how do we get CIO that maybe the IP to understand the breadth and depth as the capabilities that we have yes, thats not been a focus of our.

Messaging in the past this will allow us to just focus on that and really focus is what it all comes down here is when you get focused on doing one thing you can do it incredibly well when you split that focus you may do something well some wells.

Okay, but that's what this potential transaction allows us to do it also allows us like I said to be patient, where I think we've never been a little less patient in some of the newer markets, where we're competing I'm not saying those technologies will get rid of and we will.

We will be a little more patient about allowing those markets to come to us versus us try to go aggressively those market. They will get our growth in the mature markets, where we have very very strong position today.

Okay, and if I could just one follow up question actually it's a little bit more around today's environment.

Last quarter, you mentioned the pipeline was good and you guys had a solid quarter given everything that's going on how do you just feel that visibility as you head into the back half the year sounds like you've got better in July at June and July you, just any kind of qualitative thoughts on the environment.

Especially around just sort of purchasing ability from some of the I.T. pros. Thanks, Yes, what we sit back on the first quarter calls over waiting to see at some level of stability, we didn't need to see better we just needed see stable and stable can be a bad level. That's okay that allows us to have visibility. So I think what we saw is a lot of volatility.

Late March April May started to see some improvement some level of stabilization, albeit at a lower level that we were in January of this year obviously.

Given us.

The ability to what we believe the back half of the year looks like.

Trends have improved theres still.

Not really that close to where they were your Q4 last year early Q1. This year, but we are beginning to see improvement in activity levels.

Yes, I mentioned that one of the real challenges we saw in kind of April may June is that.

Technology pros as Didnt know what their approval process was because that was changing on them based on how the company's happened to feel on on one day or another additional levels of approval, we got stuck in the process. They didn't fully understand the getting now they understand that so when we engaged a conversation the buyer on the other side knows Walter approval is going to be that kind of know what.

What timeframe is going to take which is what has improved our level of visibility. So I think it's improving its better than it was in March and April for sure.

So I think that we will see.

Very very very small amount for improvement in Q3 over where we kind of how are right. Now on June July has been better than March April may I don't expect instrument is level improvement over the rest of this quarter and unless something happens so that we get a broader.

Part of the global economy opened in the fourth quarter I think the fourth quarter in the third quarter, while they're going to be better than Q2 are going to be a long way were from where we all want them to be but we are we continue to be confident are related to drive growth and honestly driver handle on profitability, we had an outstanding profit quarter in Q2.

Thank you won't.

Thanks.

Your next question comes from the line of Sterling Auty with JP Morgan.

Yes, Thanks, Hi, guys on bouncing between calls so I apologize if I, if I add something that you've already gone over but with the potential the MSP spin out is there going to be distinct products that go with that's been out or is there any chance that you could end up with some sort of cross licensing or some technology. That's still supports both businesses.

So certainly most of the products are dedicated to one business together. So the card you management products are really just use.

Sold into our our corporate identity and government buyers on the MSP side, they've got a product platform that is sold has been designed very specifically for the industry market because it needs to be msps need to use technology in a very specific waiting to be able meter to use the word how much. The in service are providing one customer versus another customer so they can bid.

So based on one level of usage. So the product platforms are meaningfully different the capabilities are very similar and we do have a couple of products that are relatively small amounts of revenue that we kind of repackage reposition and selling side. So we have a little bit of that but not very much.

Okay, and then one follow up I think you talked about a little bit of pressure on the net expansion from customers and we just heard that from data dog as well as saying that there was a little bit flowing in and cloud growth through through this environment is that what you were experiencing in terms of just some or just the expire.

Anson being put on pause and has that started to return in July and beginning of August.

Yes, so really I'll talk about that Illinois, the two sides of the business. So MSP side of the business what we saw in.

May in June is that our msps.

Reduced the number of devices. So think number of network elements thing number of endpoints that they reduced the number of those devices endpoints that they were managing for their end customers that continue to manage the customers environment. They didn't lose the customers, but they reduce the number of device as an endpoint. They were managing really to the ones that are were absolutely.

Vertical to the business being able to stay open why because those small businesses many of them maybe close it didnt have any revenue.

April and May have the Hay take my build down for a little bit just keep me key my heart, beating.

And when I get back open then we'll need to manage everything again and then what we said we've seen in July and so far into August is that we're seeing those device count start to grow again, so m- fees are beginning or adding those devices back there now managing a bigger percentage of their customers infrastructure again, we think that will continue as we moved through.

The back half of the year on the quite the management side of the business, we definitely saw a much.

More stringent if you will approval process for spending, which then translated into longer processes process. It take a longer period of time before a transaction will get approved within this whole lengthening of lengthening of deal cycle time. We're told a lot of really is a great conversation close a lot of transaction closed on a big transaction in the second core.

Do we sell the volume of the business dropped in the second quarter.

Some of that was at the small business level I think we'll see some of that volume come back as we move through the rest of the year I think wells continue to see our ASP strong, but I don't think it's all going to come back. This year I think we're going to take into next year at least based on.

What Chris of all I have is looking at you've got to how the economy is performing and how businesses are performing and how many businesses are fully opened merchant partially open.

Makes sense. Thank you.

Thanks early.

The operator, we apply for two more questions.

Okay.

Your next question comes from the line of Eric Supercenter with JMP Securities.

Yes, thanks for taking the question.

Minutes.

Great working with the I know you've been then youre sticking around but congratulations.

What I don't like I don't think I heard above the timing for the spin out.

You have any any rough timeframe.

Then MSP business. Okay go ahead with our yes, the spinoff, we're still pretty good bit away from being the point, we can can make a final decision before us and potentially happen. So.

Decision to convey in the next 90 to 120 days, if we decided to move forward is going to be in the first half next year before spit out and actually Hap.

Okay.

Then the MSP business, it's about 300 million out of totaled 1 billion in revenue would the head count the split in proportion to the revenues or how would we think of the cost structure between the two of them.

So the agency business is very profitable for a SaaS business, but it's not as profitable as our core argumentative business I mentioned on the call our quarterly management business last 20 years and definitely for the last several years is running at a level of profitability meaningfully above our corporate average.

It would be business. Obviously, then runs at a low level below corporate average such as Matt.

But it's very very profitable, it's got a little more headcount in percentage of revenue.

Because it's a complicated set a technology that build also msps.

Require a little more personal touch to use the word.

From a kind of support customer such success perspective, So thats, where the business is a little bigger as were hit as opposed to headcount than the global business.

Okay very good thank you.

Thank you.

And last question.

Your last question comes from the line of Kash Rangan with Bank of America.

Hi, this is actually Jacqueline on free cash.

First can you talk a bit more in detail, but the MSP vis vis the spin off like what are the constraints that you have now and what are some of the new initiatives that can be put in place post spin.

Yes, so from a constraint perspective, it really comes down to the level of investment.

That we were allocating to the MSP business, we set a global profit targeted consolidated level in order to get to that global profit target is a level of profitability that I'd demanded from that business unit and as a separate business really focused on being a growth company they'll be able to invest more or less that profit target drop.

They also will not have too.

Be part of the conversation the says Hey, I want to do that in other parts business was to do something else that required to things and resources to get those resources based on critical need based on priority based on size of opportunity that we're able to make those prioritization decisions on the road, which means they'll be able to get more done in a shorter window of time.

In terms of some of the initiatives when things, we believe theres and there's a great number of technology based services, we delivered MSP there were not delivering two till today.

In order to deliver more services, we need to build over weighted to acquire them. So on the development side. We believe we get through a combination of OEM and building brand new product and investing more in that we think we can bring more technology to market on an annual basis, which will allow us to increase the revenue stream, we're getting from our MSP partners, we don't have the.

The new partner, we could add new partner to buys that partner to buy that new service. So thats one.

The other thing I mentioned is that.

When it comes the M&A. There we think are a number of technology acquisition opportunity small business acquisition opportunities that MSP business could take advantage of because those are relatively small in terms of revenue they would not get to the priority level as the consolidated.

Excellent level that it might make sense to do though because any acquisition, whether its $5 million revenue or whether it's $50 million revenue requires a lot of effort in size really only adds about 15 or 20% to the integration effort and so in Europe multibillion dollar revenue company, it's been time by three and five and even maybe $10 million revenue streams.

But for business is doing 300 million in revenue and that technology strategic you absolutely can and should do that so thats. Another constrain we've had on the other is that.

Because we are consolidated business, because we do think about the market and interesting ways and we try to make sure there synergy both between our product, but more importantly to make sure our pricing makes sense across our global product portfolio. There are pricing and packaging options that business is not taking been able to take advantage of that it may be able to take advantage of as separate standalone business. So those.

There are few they're more but I think those are the ones that probably the easiest to understand.

And with that operator, we will have to wrap up the call and we appreciate everyone attending and for the questions.

We will talk in next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Thank you.

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