Q4 2020 SolarWinds Corp Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the solar with fourth quarter 2020 earnings call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
The question during the session you will need to press star one argue of telephone.
Please.
If you require any further assistance press star Zero I would now like to hand, the call over to your host.
MA Senior director of Investor Relations. Please go ahead.
Thank you operator.
Everyone and welcome to solar winds as fourth quarter 2020 earnings call with me today are Sudhakar, Ramakrishna, our president and CEO and Bart <unk>, our EVP and Chief Financial Officer. Following prepared remarks, we'll have a brief question and answer session. This call is being simultaneously webcast on our Investor Relations website at investors day at the solar Wednesday.
Com on our Investor Relations website, you can also find our earnings press release, and a summary, slide deck, which is intended to supplement our prepared remarks during today's call.
Please remember that certain statements made during this call are forward looking statements, including those concerning our financial outlook the impact of the cyber attack on our business our market opportunities the impact of the global economic environment on our business and the updates on the potential spin off of our MSP business the.
These statements are based on currently available information and assumptions and we undertake no duty to update this information except as required by law. These statements are also subject to a number of risks and uncertainties, including the numerous risks related to the impact of the cyber attack on our business and the potential spin off of our MSP business additional information considering.
The concerning these statements and the risks and uncertainties associated with them is highlighted in today's earnings release and in our filings with the SEC copies are available from the SEC or on our Investor Relations website.
Furthermore, we will discuss various non-GAAP financial measures on today's call unless otherwise specified when we refer to financial measures, we will be referring to the non-GAAP financial measures a reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call are available in our earnings press release and summary, slide deck on the Investor Relations page of our website.
With that I'll now turn the call over to Sudhakar.
Thank you David Good morning, and thank you for joining us today, I hope youre doing well and staying safe.
As you know I joined the company earlier this year on January 4th and this is my first earnings call with the company I want to start by thanking our employees customers partners and our shareholders for the ongoing commitment to and for the support of Sullivan.
I have long been a student of solar in the higher velocity go to market model, our broad portfolio of solutions low customer concentration strong revenue recurring base strong balance sheet.
On the opportunity to apply my background to address an expanding market opportunity to support the needs of ops Dev ops and sick of professionals made it easy for me to say, yes, when I got the opportunity to lead the company as President and CEO.
In the seven weeks that I have been with the company I've had the opportunity to spend a lot of my time with customers and partners the <unk>.
The majority of the customers that I've spoken to understand that the cyber incident that affected us and others could have happened to any vendor and especially at broadly deployed vendor like Sullivan.
Equally debt eager to address the issue and share learnings, which we are doing the other.
Opportunity that keeps coming up in the discussion is that the ability to provide guidance and input to protect the entire environments of our customers as opposed to debt focusing on our product, making us a more strategic partner.
The majority of our customers that downloaded a version of the affected code.
<unk> two of our latest tuition and continue to renew their contract with us.
While the first priority continues to be ensure the safety and security of our customers our conversations with customers and partners have also given us the opportunity to discuss the strength of our entire portfolio and of our future plan.
I have also spent.
<unk> amount of time on the cyber attack on Sullivan, both in managing the investigation as well as working closely with our employees customers and partners.
<unk> on our investigation learnings and future plans, but first I'll touch on a few financial and operational highlights in Q4 and 2020.
Our teams did a solid job of executing throughout the year in the face of a global pandemic.
We hit a significant milestone that many companies aspire to achieving non-GAAP revenue of over $1 billion.
In 2020.
We grew non-GAAP revenues by 9% year over year for the full year, 2020, and 6% year over year in Q4 Covid.
Delivered an adjusted EBITDA margin of what the 8% for each of the full year and in Q4.
On non-GAAP subscription revenue grew by 22% for the full year 2020, and on net retention rate was approximately 105% on a trailing 12 month basis.
The sustained strong maintenance renewal rates north of 90% in 2020, and the fourth quarter renewal rates held up well despite the cyber attacks on sort of events, which we announced on December 14.
We completed the essentially one acquisition in the fourth quarter between database performance annualize the day.
The debate performance monitor by the acquisition of David Cortex, and century, one we now have a comprehensive analysis and monitoring portfolio supporting a broad range of database platforms across on premises native cloud and hybrid environments.
Venue for our database management product continued to grow in the fourth quarter consistent with recent trends.
We expect century, one to help sustain backdrop.
The database solution complement our already strong network system and application monitoring solution as well as our efforts to become a leader in hybrid.
Monitoring.
The core management subscription growth continues to be fueled by service desk, which is out of <unk> products and our cloud infrastructure and application management solution.
Additionally on EM.
<unk> business again delivered double digit 15% growth in both the fourth quarter and the full year, surpassing $300 million in revenue in 2020.
We ended the year with more than 25000, MSP partners that service over 500000 small medium enterprise customers the <unk>.
Collecting on status as the leading provider of remote monitoring and management security data protection and business management solution for MSP around the world.
In December we announced the confidential submission of a form 10 registration statement with the SEC for the potential spinoff of Hart MSP business, while the process is difficult to predict we continue to target completing the transaction in the second quarter.
As part of the preparation for the spinoff the MSP business, formerly known as solar Mint MSP also announced a new brand in December moving forward the business will be known by of familiar names.
Enables extending the true of the company to reflect the performance protection and partnership on <unk>.
Partners need to power the clients and businesses forward.
Now, let me turn to the cyber attack.
Since we learned of it in December on top priority has been to ensure that our customers are safe and protected.
And the entire company has been working tirelessly to provide the remediation support our customers' cooperate with government authorities and share learnings publicly I want to take a moment to personally thank our customers employees and partners around the world for the trust.
Patience dedication understanding and support during this time.
As I came on board and learned more of it became clear that any company would be hard pressed on its own to withstand this type of dedicated and sophisticated attack by a determent nation state. It also became clear that the scope of the attack was much broader.
Then Sullivan as news and public disclosures emerged about breaches and compromises of other companies unrelated to us the.
We believe Orion platform with targeted in this campaign to create a backdoor into IP environment of select customers.
Of the threat actor did this by adding malicious code no net Sandberg two versions that we released between March and June of 2020.
<unk> has since been removed and it's not an ongoing threat in current collections of Orion. Additionally, after extensive investigation, we have not found centers in any of our more than 17 non Orion product.
One of the update that I believe is critical to share is that we previously disclosed that the number of customers that may have installed and effective mission of the <unk>.
The <unk> software platform.
FILO than 18000.
Based on our discussions with customers and our investigations into the nature of standard malicious code and the advanced Tradecraft of the threat active we believe the number of organizations actually exploited through <unk> is substantially fewer than the number of customers that may have.
Installed and the affected Bush and of the Orion platform. This is consistent with the statements by National Security adviser for Ciber and emerging technology and new logo that as of February 17th nine federal agencies and about 100 private sector companies.
From ice while attitude will always be debt of one impacted customer is one too. Many we currently believe the total number of customers potentially impacted.
Is significantly lower than what was originally feared we.
We are applying our learnings from this event and sharing of work more broadly internally. We added exiting two outlook and are secured by design and it's premised on zero Trust principles and developing a best in class secure software development model to ensure our customers can have.
The most confidence in our solutions.
We see these investments at the consistent with our goal of being a best in class provider of powerful affordable and particular solution.
We have published details regarding our efforts, but in summary, therefore, because on three primary areas first further securing internal environment second enhancing our product development environment.
And third ensuring the security and integrity of the product we deliver.
We've added a level of security and revenue through tools processes automation, and where necessary manual checks around our product development processes that we believe goes well beyond industry norms.
Sure the integrity and security of all of our products.
<unk> firmly believe that the Orion software platform and related products as well as all of our other products can be used by our customers without risk of the sunbelt malicious code.
We also formed a new technology and cyber Security Committee of our board too.
<unk> current sitting members of hardboard, who our CIO with significant cyber security experience and from the three member Committee. This committee has the responsibility to assist bode in overseeing our response to the cyber incident and provide advice to management and oversaw.
<unk> of our improvement initiatives.
Given our unique experience we are committed not only to leading the way with respect to secure software development, but also to sharing our learnings with the industry now let me turn the call over to Bart to provide you details of our financial performance, but.
Thanks to the Doctor and thanks again to everyone joining us on today's call our fourth quarter financial results reflect solid execution, while demonstrating the resiliency of our model in the face of the cyber attack.
We finished near the high end of the range of our outlook for the fourth quarter for non-GAAP total revenue ending the quarter with $265 $5 million on revenue representing year over year growth of approximately 6%.
Non-GAAP maintenance revenue was $124 3 million in the fourth quarter up 8% versus the prior year.
Driven by consistent maintenance renewal bookings and reflecting sequential acceleration in maintenance revenue growth since the second quarter, which was impacted the most by the pandemic.
This growth was driven by solid customer retention as evidenced by maintenance renewal rates of over 90% in the fourth quarter.
For the fourth quarter non-GAAP license revenue was $34 5 million, which represents a decline of approximately 23% as compared to the fourth quarter of 2019.
The decline in license revenue resulted from the continuing impact of the global global Covid pandemic the impact of the cyber attack and our continued evolution to subscription sales for our on premises products we.
We continue to see quarter over quarter sequential growth in sales of subscriptions for our on premises products in the fourth quarter on.
On premises subscription sales resulted in an approximately three percentage point headwind to our license revenue for the quarter.
Total non-GAAP license and maintenance revenue was $158 8 million in the fourth quarter down 1% versus the prior year.
Looking ahead, we expect near term headwinds on our business due to the cyber attack in the pandemic that said, we continue to see demand from both new and existing customers for our products and continue to renew existing customers, although at lower rates.
Total <unk> reached approximately $960 million as of December 31, 2020.
The reflecting year over year growth of 14%, which includes approximately two percentage points of contribution from our century, one acquisition in the fourth quarter.
Subscription <unk> grew 17%, reaching $435 million at the end of the quarter.
Subscription <unk> growth was not materially impacted by our century one acquisition.
Moving to our subscription revenue fourth quarter non-GAAP subscription revenue was $106 6 million up 20% year over year, which was driven by 16% year over year growth in our MSP business as well as solid performance in our core it management subscription business.
Our land expand and retain model has successfully driven sustained growth in our customer relationships our subscription net retention rate for the year was 105%.
Over the last year, we believe the pandemic has validated the importance of digital transformation to the small and medium sized enterprises that depend on our MSP partners for it management and security and has given us confidence in the strength of our business model.
While we've seen some reduction in spending amongst some smes. We have also seen promising trends in uptake of our solutions as well as consistency among our larger MSP partners, resulting in stable net retention rates in 2020.
Total non-GAAP revenue for the year ended December 31, 2020 was 1.02 billion.
Which represents a major milestone as we broke the $1 billion Mark in annual revenues.
Threshold, while delivering 9% growth over 2019 total revenue of $938 5 million.
For the year ended December 31, 2020, non-GAAP subscription revenue was $399 million.
Which represents growth of 22% year over year.
The growth was led in dollars by our MSP business and from a full year revenue from our TSM and visit cortex products that were acquired in April and December 2019, respectively.
Non-GAAP lease license and maintenance revenue for the full year in 2020 increased 2% year over year to $622 $7 million non.
Non-GAAP maintenance revenue grew at a rate of 7% reaching over $478 million.
This growth was driven by solid customer retention as evidenced by of maintenance renewal rate of 91, 5% in 2020 license revenue for the full year was negatively impacted by a combination of the slowdown in on premises perching purchasing as a result of the Covid pandemic the cyber attack in the fourth quarter and the impact of.
Operating previous perpetual license products on a subscription basis, which we expect to yield more revenue over the full duration of the typical customer lifetime.
We finished 2020 with 1057 customers that have spent more than $100000 with us in the last 12 months, which is an 18% improvement over year end 2019.
We are continuing our efforts to build larger relationships with our enterprise customers.
We also had a solid quarter of non-GAAP profitability on the fourth quarter fourth quarter. Adjusted EBITDA was $127 1 million, representing an adjusted EBITDA margin of 48% exceeding the high end of the outlook for the fourth quarter.
For the year ended December 31, 2020, adjusted EBITDA was $489 $7 million.
Representing on an adjusted EBITDA margin of 48% for the full year as well.
Unlevered free cash flow for the full year totaled $431 million, which reflects an adjusted EBITDA conversion rate of 88%.
The conversion rate was positively impacted by lower interest payments on our debt and improved net working capital.
Net leverage at December 31 was three two times, our trailing 12 months adjusted EBITDA. Despite the use of $142 million of cash on the acquisition of century, one in the fourth quarter.
For the full year in 2020, we reduced our net leverage ratio from three nine times to three two times, reflecting the power of our model to complete an acquisition of the size of the century, one and still delever significantly over the course of the year.
With $375 million in cash at December 31, we are well positioned from a financial standpoint to continue to invest in the future growth of our business.
I will now walk you through our first quarter outlook before turning it over to Sudhakar for some final thoughts as it.
As it relates to the full year there is uncertainty around the impact of the cyber attack on top of the continuing impact from the global pandemic.
We are encouraged by recent engagements with both prospective and existing customers and we are cautiously optimistic about growth of our business in 2021.
While ongoing customer renewals and pipeline growth are indicators of the health of our business. We feel it is still too early to predict the range of outcomes with the level of precision. We are provided in the past as such we believe it is prudent to only provide first quarter of 2021 outlook for total revenue adjusted EBITDA and earnings per share at this point.
For the first quarter of 2021, we expect non total non-GAAP revenue to be in the range of $247 million to $252 million representing year over year growth of negative one to positive 1% of.
Adjusted EBITDA for the first quarter is expected to be 98% to $101 million, which implies an approximately 40% EBITDA margin.
As a reminder, our adjusted EBITDA margin is typically at its lowest level in the first quarter of every year due to lower license revenue and an increase in expenses, particularly around social security and payroll taxes.
That said the year over year decline in adjusted EBITDA also reflects incremental spending related to the century, one acquisition investments in our MSP business in advance of the spin.
And the incremental expenses, we are making in our security related initiatives.
As it relates to 2020 and 2021 adjusted EBITDA, we expect our investments in security related initiatives to be approximately 20% to $25 million.
Non-GAAP fully diluted earnings per share is projected to be 19% to 20 per share assuming an estimated $318 million fully diluted shares outstanding.
Our outlook for the first quarter assumes a non-GAAP tax rate of 22% and we expect to pay of approximately $17 $2 million in cash taxes during the first quarter of 2021.
And finally, our first quarter outlook assumes a euro to dollar exchange rate of $1, one nine and the pound of U S. Dollar exchange rate of 134.
While we are not providing full year outlook I will say that we expect the license revenue growth to improve as we move through the year in all regions and particularly in our EMEA and <unk> regions.
Based on what we've seen so far on the first quarter maintenance renewal rates are expected to be in the low to mid <unk> in 2021.
And we are targeting to return to historical performance in 2022, as we work with our customers to ensure their success and the.
And as we continue to further enhance our product portfolio.
Increasing the percentage of our recurring revenue has been a focus of ours over the past five years and recurring revenue is now 86% of our total revenue we will continue to expand the subscription offerings of our on premises products in 2021, and make new subscription sales a priority with our sales teams.
As we said previously we continue to explore the previously announced potential spinoff of our MSP business now known as enabled.
And continue to target, having net transaction occur in the second quarter of this year.
With that I will now turn the call back over to the Doctor for his closing remarks.
Thank you bought in my various executive of assignment I have sought to let humility ownership transparency focused action and the bias towards the customer success.
My guiding principles.
We are committed to practicing these principles actively at Sullivan and as we do we will emerge stronger as the business.
Over time, we see significant opportunities to increase our relevance to customers and to expand our market by leveraging on network systems application and database analysis and monitoring tools, along with our excellent service desk and tools portfolio.
We intend to integrate our platforms and serve the evolving hybrid it needs of our customers.
It will enable.
Ops Dev ops and tech ops professions to have integrated experiences across automation and configuration monitoring visibility alerting and remediation.
These moves will further accelerate our progress towards a greater mix of subscription and recurring revenue.
As we look to the next several quarters and years, we believe that we have a growing market opportunity and we intend to organize our activities and plan to achieve and in some segments exceed market growth rates over the long term, even as we deliver strong EBITDA margin.
As the result of the operating leverage that we have created in our business.
To achieve a balance between sustained growth and strong profitability, we expect to take the following key actions.
The expand internationally to go to market investments to capture additional growth and market opportunities.
Accelerate.
On evolution to our customer success model and further enhance our sales teams ability to land new customers and expand.
We believe the critical evolution will lead to a better customer satisfaction and over time increase the lifetime value of our customers.
Continued to net ish out of high velocity go to market model, while also expanding with the enterprise and global system integrator of motion we started in 2020.
We are embarking on additional portfolio integration and packaging efforts to support enterprise customers.
Accelerate our offering strategy to comprehensively address the needs of hybrid deployments with flexible deployment that is cloud SaaS and on premises with an associated evolution to a greater subscription mix.
Selectively expand via inorganic investments that both round out the our portfolio as well as enhance our ability to capture market the opportunity faster.
Ill conclude again by thanking our employees partners and customers for the commitment to and support of Sullivan over 20, plus years. We have earned the trust of our customers by delivering powerful and affordable solutions and I'm confident that going forward.
We will be known for delivering powerful upgradable and secure solutions.
And I will now be happy to address your questions.
Yes.
Yes.
Yes.
Operator, we're ready for questions.
At this time, if you would like to ask the question Press Star.
And the number one on your telephone keypad the star one to ask a question.
On your first question comes from the line of Sterling All true with J P. Morgan.
Yeah. Thanks, Hi, guys you touched on a number of the key elements, but I wanted to dive back in the.
Pacifically around kind of the comments that you made about improvement through the year on.
The kind of the demand picture in two ways number one want to make sure I understand how much.
Are you kind of baking in in terms of improvement in the small piece, which is the licensing but more specifically the subscription are you expecting that the demand for subscriptions will bottom in March and then start to show some improvement through the year.
Yes, Sterling I mean, we talked about what the what we've done so far in the fourth quarter as it relates to subscription sales being of 3% headwind to license revenue that's fairly consistent with what we saw in the other quarters in 2000, and 2020 right and so we're expecting that headwind to continue in 2021 and like we said we were.
Make subscription sales of priority. So if anything that headwind is only going to be even a little bit stronger as we move through 2021.
Right, but I guess, what I'm asking is the demand impact from the breach are you expecting the demand for your subscriptions.
Not the mix, but just demand for subscriptions in general to kind of hit a bottom here near term and then show improvements through the year, yes, absolutely as we've been as we've been building out our forecast for 2021 Sterling, we expect the biggest impact to be in the first quarter.
And then as we move through the rest of the year, we expect demand to continue to improve.
And then just one follow up on the maintenance you gave us maintenance renewal rates, but I wanted to understand when you think about the seasonality of when those maintenance renewal contracts come up what does that mix look like because I would imagine that that would be more weighted towards Q4. So.
Are you expecting that the biggest maintenance hit might actually not come until Q4.
Certainly there is not really a lot of seasonality as it relates to our business when I look at what our bookings are from a REIT from a maintenance standpoint, they're consistent quarter in and quarter out. So although we have some of our customers that like to co term two of fourth quarter maintenance renewal date, that's just not a trend that we've seen historically.
Understood. Thank you.
Your next question comes from the line of.
The <unk> with credit Suisse.
Great. Thank you so much and good morning.
Sudhakar I think it's pretty clear that sunburst is a wakeup call for the entire industry. This is not of solar ones issue, but an industry issue and it's it's good to see solar ones, taking the leadership position in addressing these types of attacks.
I wanted to ask the question.
I think maybe difficult for you to comment on but just on the.
The future liability and potential litigation related to Sun burst. How are you thinking about any of these liabilities and customer claims and the degree to which.
Silhouettes might be covered by its licensing agreements.
Thank you for the question. The point you made last is the most relevant one which is much like most software companies.
Through our end user licensing agreements.
And as you mentioned.
<unk> is not just the Sullivan's specific.
Issue, but it's a broader industry issue.
And as the also no.
The most software vendors Unfortunately.
Unfortunately have vulnerabilities that they disclose and correct on a go forward basis, and so we have similar practices at Sullivan's as well.
Okay, and maybe just the follow up for Bart.
I want to make sure I heard something that you had called out.
And I heard of correctly, which is 2020 to 25 million secured in security related initiatives can you maybe the finer point to the timeframe and the cost of remediation related to the east to the incident versus ongoing changes to your business process related the sunburst.
So yes of the $20 million to $25 million is the cost that we expect to incur throughout all of 2021 and Thats. The combination of both security initiatives that the doctor talked about as well as just general increases in some of our expenses such as we expect our insurance costs could go up in 2021.
And then there's other there's other charges from our some of our professional fees will go up as a result of the of the.
Of the cyber attack as well so.
Really just the $20 million to $25 million number was to give you some context of what we expected the increase in our in our expenses to be.
And not just for 'twenty, one, but as we move forward as well and.
You talked about mid I believe load of mid eighties renewables. This year is there a difference between your public.
And private sector maintenance renewal rates.
You know I'm at the the the renewal the first of all of the renewal rates that we gave you the the the low to mid eighties, you know that that that takes into account both of our federal as well as our commercial customers. So that's that's not a renewal rate that we've historically broken out between those two two pieces of our business.
So the load of mid eighties range that we gave you reflects both of those as well so and then as far as the case of our business the pace of our business in the first quarter, obviously, it's been impacted by the attack, but we're seeing positive trend.
And like I said, we expect the first quarter of 2021 to be the one that's the most heavily impacted as it relates to the new new license sales.
And just to add on to bought comments.
I have been spending a lot of my time.
With our customers both in the public and in the private sector.
And especially with the federal government customers.
Spending time of day Icao's sito's of highlighting as you put it transparently the the findings from San both as well as the immediate steps.
A lot of our customers as I mentioned in my remarks.
Bad reaction that has been one of understanding and many of our customers, including in the public sector of already upgraded to our immediate that the code.
That's that's great and then.
On on enable the MSP business.
Think of growth there I think both expanding the number of Msp's, but also expanding what you can sell sell to them.
I guess on the second part is we progressed of this year of beyond.
How do you think about adding more services to to that to that business.
I'll take that back so the the enable business as we're going to be branding. It going forward of will continue to expand its portfolio. We recently made some strategic announcements as it relates to our partnership with Sentinel as an example, so far a business that was largely folk.
Because on the remote monitoring in the past it has already evolved and continues to evolve into data protection into security and in the future I'm sure, we'll explore additional avenues like analytics and insight as well.
Thanks, guys actually maybe the bark just a quick quick just last one here could you remind us again about your your exposure to the federal.
Segment.
Roughly what percentage of total revenue is that said some of them.
Local kind of of the.
Yeah, I mean, that's not the number that we've historically broken out Matt.
Federal business is it obviously is a big piece of our revenue, but it's not a number of that we've been big enough that we have that we've had to disclose separately.
Got it thanks, a lot guys.
Operating ready for the next question. Your next question comes from the line of Strange it's the same with Morgan Stanley.
Thank you for taking the questions and congrats on the roles of Duecker, an even bigger kudos for accepting the all just given the headlines in December.
It seemed like the business.
But the does he like the business is proving resilient and I just wanted to die.
Dive into a couple of topics one on sort of the comment around just kind of half of that one I think most of US would certainly agree but is there any sort of that we sort of look at solar winds was there any sort of things from on operations perspective that made the cut the the more or less vulnerable.
Lots of to your peers, whether it comes from the having distributed public engineering teams or anything that like the company is going to do.
Better.
Too I'm sure of any any any potential of on their ability to the operation site. That's my first question.
Kind of thanks for the the.
Welcome.
As it relates to why we believe it could of happened to anyone as the deconstructed more debt fed taxes did of the pound.
Malware essentially can be injected into any supply chain. That's the reason why the publicly disclosed it so that other companies can.
Look at their own supply chains, and potentially protect them from the book current and future future attacks.
As it relates to was there anything specific to.
To the third of an environment, we could not find anything that was idiosyncratic to the Sullivan environment and if anything.
Both of our security hygiene security posture security tooth consistent with what the.
Is practiced in the industry.
Got it and then.
As you sort of manage through.
The the solar storm compromise and work with your customers I guess the the larger question is what is your vision for solar woods as the as the company sort of comes out of this and then as you look at.
What the company is sort of focused on the strategy, how the sort of balance growth versus margins should we see your tenure sort of <unk>.
Extending that line of thinking or are you looking to change things fundamentally from the from a strategic perspective, what sort of your initial thoughts on how the business will be run and managed going forward relatives do.
Relative to the past.
Definitely.
Focus will be.
Too.
Sensually extend the strategy in the following day.
Personally believe we have the.
The broadest portfolio.
If I may use that term in.
Network systems application and database monitoring combined with our IP service desk as well about two of the portfolio.
Going forward, what we intend doing is integrating them into a way that we can support the hybrid needs of our customers. So that they can deploy on premises on in the cloud and we will be able to provide them consistent capabilities with one integrated platform.
Additionally, we feel that as of significant opportunity for us to a fan of monitoring the first into the automation and configuration of aspects of things then on to alerting and remediation without it sort of a desk as an integrated portfolio that we are able to support the entire life cycle.
Of our customers that is what we see as the market opportunity for growth going forward.
And as we do that we will continue the balance between growth and profitability and continue to demonstrate the operating leverage that we've created in our business.
Understood.
A great overview of I can sneak one for the.
Part of part of the question is is why is there sort of lingering hesitation on and on guiding for the full year. If I look at some of your cohorts debt. So on the signal similar segments, the sort of gotten back to an annual guidance cadence.
R accelerated this quarter. The Q1 guidance is more of less in line with consensus. So the the question of the sort of of what is the fear around providing guidance given that the business looks on.
At least some impact but it doesn't seem like there's tons of the volatility and the numbers at least at least so far.
Yes.
Some of it thanks for the question.
Like to talk about the fact, the recurring revenue is is 85 or 86% of our total revenue.
But we do he still have a license piece of license component as it relates to our revenue.
And there's just enough variability in the full year of 2021 and.
And enough there's enough.
Of uncertainty around what our new license sales are going to be that we just weren't confident to get enough to give a full guide we like to be pretty precise when it comes to guidance.
And there's just enough there's there's a broad enough range of outcomes that we just weren't confident give a full year guide at this point.
Understood. Thank you for taking the questions.
Your next question comes from the line of Eric Super Jerwood JMP Securities.
Yeah. Thanks for taking the the question and welcome most of the darker.
One can you provide some context around the turn of in the federal sector versus the the.
<unk> do non stop.
Of the sector clearly this this attack was was.
Primarily targeted to the federal customers and it would be helpful for us to understand what the impact. This is having on the non February of sector particular.
Sure I would say at this point.
To lead to quantify Chun as it's been about a little over two months since this whole event.
Upload.
The day I would describe our activities are one of the engagement and one of helping customers remediate and look forward. So through our conversations and as I mentioned I personally have had many conversations with both private and public sector estimate.
I would say some customers have taken a vacancy attitude, but not necessarily a focus on churn or replacement at this point in time.
Additionally, as I mentioned, the vast majority of the customers that I have spoken to and we continue to engage with have not on the upgraded the but many of them also have renewed debt contracts. So those of the indicators that can present to you at this point in time, not so much of specific turn indicator and Eric the.
The expected renewal rates that we that I provided you the low to mid eighties for the full year that includes both of our commercial as well as our federal customers. So so yes, we are seeing a lot of questions when customers are up for renewal.
But like the Doctor said right now, they're taking more of of wait and see approach.
It's not that they've that they're immediately turning us off or not renewing their maintenance contracts and I also believe that the.
Because of two important factors when the.
Customers that we speak to and customers, who abused multiple software vendors recognize on understand that vulnerabilities and software issues can happen to any vendor. That's number one number two that it is a reflection of the confidence in the breath of power portfolio and our ability to deliver there.
Customer of their success.
Okay, then real quick on the on the enable spin out could you tell us with the growth was in the school 19.
On how that can obviously it was 15 per cent physical 20, so just curious with the.
The the trajectory as the.
So yeah, the MSP business, Eric just like a lot of other businesses was impacted by the Covid pandemic in 2020, So 2019 growth would of been slightly higher than that 15% that we saw on 2020, but any of the impact as it relates to growth.
From <unk> from 2019% of 2020 was really due to the pandemic in a little bit of of the slowdown that we saw on the second quarter and we felt really positive trends in our MSP business in Q3 and Q4.
So can we assume that that's a high teens type growth on a normal get license.
Yes, that's the goal.
Thank you.
Your next question comes from the line.
Great deal with Jeffries.
Hi, This is the soda on for Brent too and welcome to the darker to settlements.
I wanted to ask one quick one on the.
There has been a bit of focus on the renewals and.
Are you sort of offering any concessions to the customers that of renewing or.
Are these normal conversations that you would otherwise have.
Our conversations on the the annual front.
Have been normal.
Other than the fact that in some cases, we've had to explain to customers of what we're doing bevy of headed libation feel secure et cetera if.
If your question is related to prising promotion I would say our behavior has been per.
What it always has been.
Got it and maybe one quick follow up if I may on the.
You mentioned some of the investment to making this year on the product side I wanted to ask.
Some of these investments peed on the product of the go to market side.
The more longer term in nature or.
I'm trying to assess longer term margin in fact of longer term margins. Thank you.
CL of what we've talked about on the the what we've talked about primarily was expenses that related to the security incident. So the doctor talked a lot about our secure by design initiatives and they're going to be some costs associated with that.
But like I said, we expect those costs to be in the $20 million range in 2021, so when you're thinking about what margins are going to be longterm. What I would tell you is is that we think that margins.
We're going to be at the lowest level in Q1 and margins will improve as we move throughout the year.
And then as we look at 2022 and beyond we're always going to we're going to always way investment decisions and tried to decide between both growth and profitability.
And the great how about the of question about the the some of these investments and.
Field returns of this year versus longer term.
Some of the investments that I outlined are expected to elaborate tons of this year.
Most likely on the back half of this year.
On on into 2022.
Great. Thank you again.
Your next question comes from the line of cancel the Crane.
Hi, and welcome to the darker and completely agree with you I think the more we learn about the nature of this highly manual talk the better we can appreciate it could happen to anyone so.
So it's encouraging the customers are of green, but the research. We've also found the adopting zero trust is one of the more effective ways for customers and vendors to protect themselves from these types of attacks, though given your experience with your of trust wallet pull securities the opportunities to leverage of experienced some sort of of today.
Absolutely so as part of our of take care of I'd design.
Initiated that I outlined as I mentioned I don't look at this as the remediation effort as much as an ability to set the stage for a leadership effort over of February of quarters and years. So.
One of the key aspects of secure by design on a couple of key aspects I would say is that it is premised on zero Trust principles.
And when I say that debt.
That applies both to our infrastructure as well as how we plan to build products going forward. So some of the conversations that I've been having with customers. For instance is how do we establish less privileged access models within both our products as well as other vendors products that enable.
Of the safety and security of our customers. So this is the point I was making as I was describing the.
At one opportunity that comes up in our conversations with customers is not only have the protect them through our products, but also provide guidance to them across their environments that as the rooted on at least privileged faxes or the veto trust principles and other related contracts.
Alright, the that makes perfect sense is very helpful. So on more of some of the MSP side was encouraged to see the productivity of the name change to enable in December. We're just love your load the more color on decision to adopt what's been of strong brand name.
For some time in how receptive customers have been so far.
Thus far the reception, but from a partner community has been very strong.
In terms of the enable brand and as you know the Msp's business primary objective is to enable partners in turn enabled small medium enterprise customers. So the partners find that this is a nod to the model and the.
Redoubling as the committed to expanding the business.
Okay. Thanks, that's it for me.
Your next question comes from the line of Rob Oliver.
<unk>.
Yeah.
Great. Thank you good morning, guys and hope you're doing OK down there in Austin, the tough couple of weeks on.
Down there.
<unk> the one for you on the part I had a follow up for you as well just the soccer on the on the subscription products.
It does sound like a demand as kind of coalescing nicely around the old some adage product I TSM and around database.
<unk> is that right and are there other products in that portfolio of SaaS subscription products that you are optimistic about or perhaps you could take the opportunity to talk a little bit about how you view expanding that portfolio.
Lately the.
Observations that you made on both of the service desk and database are absolutely.
Headache.
In addition to that.
Two additional packaging and integration considerations that we are executing throughout this year that applies broadly two hour.
Pilot traditional products based on the Orion platform, including network and system management. So as a result of that I expect the subscription mix of that business to continue to grow as well now if you would take a of perspective of a few quarters out as the integrate our platforms into.
Much more of a singular motion been increasingly primary motion will become subscription on that particular platform. So over time. The goal is to improve the mix and expanded from the current 86% do something higher going forward.
Okay, Great. That's that's helpful color and I think that ties.
Directly part of it to what my follow up question of with you is going to be which is you know.
Guys traditionally have been.
Gnostic as to how your customers bought it so clearly of change here on this call on I guess you of comment relative to prioritize subscription we go hand in hand, with what's the darker shed.
Other incentives built in there for the sales force on any other changes.
Relative to the go the market and I would assume you are you going to do this and keep consistent with sort of the kind.
Leanne like go to market model of the solar which is always part of your thank you guys very much.
Yeah, Rob I mean.
As it relates to our subscription offerings.
Like you said, we've been agnostic at the end of the day, we want we want the the end user to have the ability to purchase and either in either under either in the subscription arrangement or under our traditional license maintenance agreements right.
And we're not going to change that however of from an investment standpoint, we are going to put more dollars behind some of our on premises products and we're going to try to make that a priority as we move forward.
I appreciate it again.
Your next question comes from the line of current Mottern with Evercore ISI.
Hi, guys, how Ya doing this is actually Peter Berkeley on per curve. Thanks for taking the time to answer the questions here.
My first one is and I apologize if I missed that on your prepared remarks, but just wondering if you guys have any update just on the timing of the spin out of the MSB of business.
So yeah, we're still expecting that spin out to happen sometime in the second quarter.
Okay, great awesome.
And then just one quick follow up.
Just wondering I mean, it sounds like the the cyber attack had more of an impact on the license and pieces of the business, which makes sense, but I was just wondering if it had any impact on the MSP business at all as well.
There was a slight impact in January just as some of our MSP partners and some of our some of their in customers.
First the.
The the potential impact.
Once we were able to.
Assure them that none of our MSP products were part of the cyber attack, we started to see the MSP business get back to this form.
Okay, Great Awesome. That's helpful. Alright, thanks, very much guys.
Your next question comes from the line of Mohican Gavea with Barclays.
Okay. Thanks for taking my questions. This was on.
Wondering if you can I mean, when bending initially discussed and announced the the spinoff of last year.
You you had a framework for the sort of stand alone most of the spinoff on the MSP business, what the growth on profitability of streaming will take will find window quite quite and all of the citizens of changed somewhat.
And the New York discussing some incremental investments and security and also the broccoli and most of my Sweet So this woman.
Sort of like maybe touched on if any any full force have moved switching solwin's standalone of your head discuss the low to mid single digit store and the make the long term.
MSP business something you had this question of mid to high teens, but just the studios of significant of different Hollywood thing about the two separate businesses force. The spin off in terms of growth Force you spoke of stability and then I have a fall of course. Thank you.
Yeah, I mean, the one of the reasons why we didn't provide full year guidance is because there's still a certain amount of uncertainty as it relates to the revenue side of our business.
The goal is to continue when we split the MSP business in the core business.
To have two separate companies they'll have to somewhat different financial profiles.
The the core business, we talked about being a mid to high single digit grower that will obviously be impacted as it relates to the cyber attack in 2021, but we think that those impacts will be short term in nature, and we think as we move into 2022.
We will continue to look like the company, we talked about when we announced the MSP spend last year.
The operator, let's take one more question.
Okay, and you do have a follow up with Sterling Hollywood J P. Morgan.
Yeah. Thanks, guys. So just actually on the spin.
Gotten the number of questions sort of investors around if there's any change or update and thinking in terms of how the two companies would be capitalize the in other words, where with the debt actually go and would there be any need for any financing actions along through that process.
Sterling, we're still looking at the potential capital structures of both of the businesses long term and post spend.
So when we move into the second quarter will have more discussion around that.
Perfect. Thank you all right.
There are no other questions at this time.
Okay.
Thank you again to everyone for joining us and we'll be in touch.
Yeah.
This concludes today's conference call you may now disconnect.
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