Q1 2021 SolarWinds Corp Earnings Call
Yes.
[music].
Good day, and thank you for standing by and welcome to the solar wind and first quarter 2021 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 to ask a question. During the session you will need to press star one on your telephone.
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I would now like to hand, the conference over to your Speaker today, Howard MA Senior director of Investor Relations.
Please go ahead.
Thank you Sumner and.
Good morning, everyone and welcome to solar and just first quarter 2021 earnings call with me today are Sudhakar Ramakrishna, our president and CEO and board calcium EVP and Chief Financial Officer, and John and how you get EVP and President NAV enabled following prepared remarks, we'll have a brief question and answer session.
Call is being simultaneously webcast on our Investor relations website at investors out slogans dot com and our.
And Investor Relations website, you can also find our earnings press release and summary, slide deck, which is intended to supplement 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 and the cyber and sitting on our business our market opportunities and <unk>.
Pack and the global economic environment on our business and the updates of the potential spin off of our naval business. These statements are based and currently available information and assumptions and we undertake no duty to update this information except as required by law. These statements roles and subject to a number of risks and uncertainties, including the numerous risks related to the cyber incident and the potential spin off of our enable business.
Additional information concerning these statements and the risks and uncertainties associated with that 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 what we refer to financial measures, we will be referring.
The non-GAAP financial measures.
A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call are available and our earnings press release and summary, slide deck on the Investor Relations page of our website and with that I will now turn the call over to James Sudhakar.
Thank you Bob.
Good morning, everyone and thank you for joining us today, I hope youre doing well and staying safe.
Wanted to start by thanking our employees customers partners and shareholders for their ongoing commitment to and for the support of sort of it.
Completing my first full quarter at Sullivan, and then and then dive and inside and David.
And it first hand, the tremendous dedication that our cash.
And our employees have to customer success.
Competence and commitment and attitude displayed to execute on a day care by design initiated and to deliver demonstrable and is that the.
Commitment and trust, our customers and partners lease and that's something we deeply Kurdish and do not take for granted and we accelerate our journey to help them from us step and and increasingly hybrid book I continue to spend a lot of my time with our employees customers.
And partners.
The conversation and the quarter and largely about the cyber incident.
And what's happening and increasingly so.
And innovation are much more focused on what had been done and how can we apply what we have learned to ensure the safety of <unk> and London and.
Those are our customers.
In this regard.
Take care Bye design initiated enabling us to have broader conversations approximate thereby bolstering our RASM and do them even further.
And expand on this in a minute.
With respect to the cyber incident, we are also coming today and all of our investigation and we continue to provide updates as we conclude that.
I will now touch on a few financial and operational highlights in Q1.
Our teams did an excellent job of maintaining focus on delivering customer success. Our partners played a pivotal role and we executed.
Ian assistance program in support of our customers.
For the third quarter, we delivered revenues and then above the high end of the range of our outlook, Mr. Tony non-GAAP revenue ending the quarter at $257 million and that's exactly yet and will be a growth after three per se.
And.
First quarter adjusted EBITDA was $106 5 million, representing an adjusted EBITDA margin of 41% exceeding the high end of our outlook for the first quarter.
Our Q1 call it management maintenance and annual rate of 87% is higher than the low to mid 80% renewal rate. We noted that we expected in 2021, when we discussed our full year results in February.
We continue to focus on customer retention as a key priority and hope to grow back to our historical and best in class renewal rates of over 90 per test.
Our largest customer renewed with us, but also increasing their license accounts.
<unk> also seen other customers, including those in the federal sector expanded and investments that sort of been in the first quarter.
We see these wins and validation of our team's proactive and sustained effort to deliver industry leading solution.
No Tony parcel and available but also secure.
And naval business again delivered double digit 13th and revenue growth in Q1, and we continue to expand our portfolio in support of our MSP partners and.
And SME customers given the potential spinoff of the business John value they provide a business update on this.
We and accelerating our momentum in the database monitoring segment with the formation of a dedicated <unk> team to help us capture what we believe is a large and growing market opportunity of over $6 billion.
We were recognized by Gartner in the Magic quadrant for application performance monitoring and another pillar of future growth potential for US alongside our database monitoring business, we expanded our offerings in Q1, and we continue to evolve to a full stack Absorbability company.
It helps accelerate the digital transformation needs of our customers why and integrated platform automation and monitoring alerting and remediation capabilities, leveraging AI and ml techniques on a unified cloud platform to support hybrid deployment.
Slightly.
We expanded our management team with the appointment of Andrew got Bad as our Chief customer Officer, Kim Brown as our Chief Information Security Officer, Andrew <unk> as our Chief product Officer. Additionally, data and Bliss assumed the role of Chief administrative officer.
So integrating the corporate function up HR and corporate development legal and it.
In addition, we added key management members to enable business, including a chief technology and product officer, a decade constant chief customer officer, and Chief people officer, and enable prepared to operate on a standalone basis.
Now, let me turn to an update on our secured by design and initiated.
The recent cyber incident, again, Sullivan and other widely used technology providers and other and their customers.
Concerning new reality for the software industry.
<unk> represents the increasingly novel and sophisticated action used by outside nation space on the supply chain and infrastructure on which we all rely and illustrate the need for the industry and public sector to work together to share and real time information.
Sullivan and make it to sharing our learnings about this and largely given the common development practices and the industry and our belief that transparency and cooperation and our industry's best to just help prevent and protect against future attacks and we see and all.
<unk> had to help the industry.
To help lead I mean, that's pretty wide effort that we believe will position Sullivan as our model puts the QA software environment development processes and products and in fact this is increasingly the topic of discussion as I engage more closely with our customers and partners.
Over the past three months.
And I T product and development teams have been committed to implementing its Cds of action.
And to further enhance the security of five and environment and system against attack, including adopting lease privileged access mechanism and addressing further potential risks associated with third party applications axis.
And I also recognize that our security posture and procedures and dependent on the people at Sullivans and so we are investing Additionally, rigorous security training put out and.
Please.
<unk> continues to resonate well with customers and partners and this is Michael to proliferate them as rapidly as possible.
We see these initiators and investment and being consistent with our goal of being a best in class provider of powerful affordable and take care.
Now, let me turn the call over to John to provide and update on the enable business John.
Thank you Sundar.
I'll spend the next five minutes, giving updates and enable business from first quarter performance.
I'm excited to announce and Q1, we completed the rebrand of enable across our platform solutions, new websites and partner community sites.
Also on April 14th and.
Analyst day from equity analysts.
I want to start by recapping some key points from our presentation.
First the market opportunity for enable starts with small and medium enterprise it spending and just over a trillion dollars globally and growth.
Suvs deal with nearly as much complexity and larger enterprises, but our team management and security and not the core competencies and most smbs.
As a result.
These have increasingly turned to MSP to be their trusted partner through their digital evolution and in turn and.
<unk> technology that can be effectively and effectively address SME customer needs.
Using our purpose built software platform and <unk>.
Sps are able to not just build successful service offerings, but also play an increasingly important role in shaping SMB it spending decisions we.
We believe the market opportunity for our software solutions, and approximately 23 billion and expected to nearly double by 2025.
And second why do we win.
And we win because we're architected for the MSP to enable them to effectively scale their businesses and our purpose built across three pillars.
The first is our margin breadth and depth, which has always been a strength of both enable and Portland, Oregon.
MSP partners that live and our platform day in and day out rely on and centralized view and alerts we provide on hundreds of thousands of different and customer environments and devices.
And Q1, we expanded our monitoring Dave <unk> with our Microsoft and tuned integration, allowing MSP partners to perform and tuned device management functions directly with the enabled platform.
We also extended our iOS device coverage to math workstations, and remote access capabilities and two additional types of network devices.
Our second area of strength as our data protection and security solutions, which are fully cloud based and seamlessly delivered via our RMM platform and.
And our MSP partners and truly layered approach to protecting their customers.
In addition, <unk>.
Our platform gives our partners acceptance and customer environments. The security of our platform is extremely important.
And in light of and secured by design initiatives that the Doctor has discussed in detail, we have and continue to implement and product security enhancements to our enabled products such as multifactor authentication single sign on and SSH for network devices.
Third we offer what we believe are best in class partners success resources and train our partners and how to improve efficiency and build stronger books of business and become a better business operators.
This helps drive retention and expansion on our platform.
We look forward to hosting our global and power event later this quarter and the discussions we'll have with our partners on industry trends and how to solve the challenges they face.
As we strive to become a Standalone book 50 company with a heavier lean towards growth following the potential spin off transaction.
And I want to highlight the unique aspect of our growth model called the partner enabled expansion.
We grow when we add new MSP partners and help our MSP partners growth.
That's the fuel and propelled the model.
After landing and partner, we grow when the partner adds new technicians that use our cell two solutions.
More significantly we grow and the partners add new SMB customers and we.
And those Smes and employees and devices under management.
And we grow again, when our MSP and deliver additional solutions powered by our platform.
That's the power of our sell through model and also the biggest driver of our net retention rate.
Through this partner enabled activity our partners essentially act as an extension of our sales force.
Turning to enable Q1 performance.
We delivered a solid 13% total revenue growth and 15% subscription revenue growth, especially considering a couple of headwinds worth noting.
<unk>.
After the cyber incidents at the end of December.
We slowed our demand generation and sales activity, which impacted new partner additions and expansions and January and February.
And before returning to more normalized levels in March.
Second the continuing impact from COVID-19, which we began to experience during Q2 of last year.
And it's a modest year over year headwind, although the impact on our subscription revenue growth rate has continued to improve since the initial deceleration in Q2 of last year.
Looking ahead, we're cautiously optimistic about improving conditions for the balance of 2020 one.
And we provided at analyst day Prism and the <unk>.
GAAP analyst day presentation.
Our outlook for enable revenue growth as approximately 40% in Q2 and improvement over Q1, and 12% to 14% growth for the full year, assuming the spin occurs over the coming months.
We are making investments for growth and R&D International go to market and partner success that we believe will position us for growth and celebration as we exit 2021.
We remain excited about the planned spin of enabled which we are still targeting to complete for the coming months.
With that I'll turn it over to Bart to provide more details on our financial performance and outlook.
Thanks, John and thanks, again to everyone joining us on today's call our first quarter financial results reflect solid execution, while demonstrating the resiliency and sustainability of our model we.
We had a much better quarter than anticipated and finished well above the high end of the range of our outlook for the first quarter with total non-GAAP revenue and ending the quarter at $257 million.
Representing year over year growth over 3%.
Total enable revenue was $83 million representing growth of 13% John just talked about what is driving that piece of our business and total or poor management revenue was $174 million.
Total license and maintenance revenue was $147 9 million and the first quarter down three 5% versus the prior year.
Maintenance revenue was $123 million and the first quarter up 6% versus the prior year.
We typically disclose the maintenance renewal rate from perpetual license products on a trailing 12 month basis.
Our Q1 trailing 12 month rate was 91%.
However, given the heightened focus on smaller windows and performance since the cyber incident, we want to provide the in quarter renewal rate for Q1, which was approximately 87% visit.
This exceeded our expectations for renewal rates and a low to mid 80% range throughout 2021, which we provided on our last earnings call.
In addition, we expect this renewal rate of 87% to increase by a few percentage points.
On historical trends after factoring in renewals and expired bookings that occurred post quarter end.
For the first quarter license revenue was $24 9 million, which represents a decline of approximately 33% as compared to the first quarter of 2020.
The decline and license revenue as a result of the combination of the impact of the cyber incident.
The continuing impact of the COVID-19, pandemic and our continued evolution to subscription sales per of on premises products.
Our on premises subscription sales resulted in an approximately two percentage point headwind to our license revenue for the quarter.
That said, we believe that the first quarter should be the most negatively impacted as it relates to the year over year growth.
We substantially halted our demand gen activities from December through the early parts of the first quarter as we focused our efforts on assisting customers.
We believe this negatively impacted our new license bookings and the first quarter and and the early portion of the quarter in particular.
We saw acceleration and our business as we move throughout the through the first quarter and we are working to continue that trend as we move through the rest of the year.
Looking ahead, we expect to continue to have near term headwinds on our business.
Total <unk> reached approximately $961 million as of March 31.
Reflecting year over year growth of 12%.
Subscription and <unk> grew 13%, reaching $438 million at the end of the at the end of the quarter.
Moving to our subscription revenue first quarter non-GAAP subscription revenue was $109 1 million.
Up 15% year over year, which was driven by enabled 15% year over year subscription revenue growth as well as solid performance and core ITE management subscription revenue.
Our land expand and retain model has successfully driven and sustained growth and our customer relationships.
We finished the quarter of FERC. We finished the first quarter of 2021 with 1074 customers that have been.
And more than $100000 with us and the last 12 months, which is a 16% improvement over the previous year and 17 more severe and we are continuing our efforts to build larger relationships with our enterprise customers.
We also had a solid quarter of non-GAAP profitability and the first quarter.
First quarter, adjusted EBITDA was $106 5 million.
Representing an adjusted EBITDA margin of 41%.
Seeding the high and the outlook for the first quarter.
Unlevered free cash flow from the first quarter totaled $51 million.
Excluded from EBITDA, and Unlevered cash flow Unlevered free cash flow or one time cost of approximately $20 million, including $10 million of spinoff related costs and $10 million of cyber related remediation containment investigation and professional fees net of insurance proceeds.
Yeah.
I do want to clarify the day cyber related costs not included in adjusted EBITDA are onetime and nonrecurring.
They are separate and distinct from the 20% to $25 million and secure by design initiatives, which are aimed at enhancing our it security and supply chain process.
These costs will be part of our recurring cost structure on a go forward basis.
We expect onetime cyber related cost to fluctuate in future quarters.
To be less in future periods and the amount incurred in the first quarter.
And these one time fiber costs are however difficult to predict.
And not only include the significant cost of the forensic investigation efforts that we are expecting to conclude in the near future, but also costs associated with our ongoing litigation government investigations and potential judgments or fines and related professional fees.
We expect our insurance coverage to offset a portion of these expenses.
We expect our one time spin related costs to subside following the completion of the spin off which we are targeting and complete in the coming months.
Net leverage at March 31 was three two times, our trailing 12 months adjusted EBITDA with.
With $374 4 million and cash at March 31, we believe we are well positioned from a financial standpoint to continue to invest and the future growth of our business.
I will now walk you through our outlook before turning it over to the Doctor for some final thoughts.
While ongoing customer renewals and pipeline growth are indicators of the health of our business. There is still enough uncertainty around the impact of the cyber incident on top of the continuing impact from the global pandemic. We feel it is still early too early to predict a range of outcomes with the level of precision that we have provided in the past as such we bill.
Leave it is prudent and to only provide second quarter of 2021 outlook for total revenue adjusted EBITDA and earnings per share.
For the second quarter of 2021, we expect total non-GAAP revenue to be and the range of $254 million to $258 million representing year over year growth of 3% to 5%.
Adjusted EBITDA for the second quarter is expected to be $102 million to $104 million, which implies and approximately 40% adjusted EBITDA margin.
As a reminder, our adjusted EBITDA margin is being impacted by the incremental spending associated with the senior secured by design and initiatives that we began implementing and the first quarter as well as the growth initiatives that Jon and enabled team are executing and anticipation of the potential spinoff.
Non-GAAP fully diluted earnings per share is projected to be 21 per share, assuming an estimated $319 $6 million and fully diluted shares outstanding.
And last our outlook for the second quarter assumed and non-GAAP tax rate of 22% and we expect to pay approximately $22 million and cash taxes during the second quarter of 2021.
While we are not providing consolidated full year outlook I will say that we continue to expect license performance to improve versus Q1, as we move through the year and all regions.
Based on what we've seen so far and the first quarter, we expect that maintenance renewal rates will be and the mid <unk> for the rest of 2021, and we are targeting to return to historical performance and 2022 as we work with our customers to ensure the security and success and as we continue to further enhance our product portfolio.
Increasing the percentage of our recurring revenue has been a focus over the past five years and recurring revenue is now at 90% of our total revenue.
And we intend to we intend to continue to expand the subscription offerings of our on premise products and 2021 and.
Net new subscription sales and priority with our sales team.
And finally with respect to our conversion of adjusted EBITDA and free cash flow our rates and the first quarter was well below our historical trends and the conversion rate was negatively impacted by lower license and maintenance renewal bookings and the ongoing revenue mix shift to more subscription as well as annual bonus payments, which are seasonally higher and the first quarter.
<unk>.
We expect our conversion rate for the full year to be above 70% and grow to the low 80% range in 2022 with that I will turn the call back over to Sudhakar for his closing remarks.
Thank you Bob.
Competent commitment and attitude was evident as we delivered a strong Q1 per common and deliver results exceeding our outlook in both revenue and EBITDA.
Confident that our continued focus on customer success will make us even more rather than as we evolve our platforms and serve the evolving hybrid it needs of our customers.
We expect to enable ups.
Dev ops and tech ops professionals to have integrated experiences across automation and configuration monitoring visibility alerting and remediation. These.
And these moves will further accelerate our progress towards a greater mix of subscription and recurring revenue.
For the remainder of 2021, our focus will continue to be on executing on the initiatives that I outlined during our Q4 earnings call and focusing on customer retention and demonstrating ongoing progress and subscription license and maintenance growth across all geographies and sector.
And I'll conclude by again thanking our employees partners and customers for their commitment to and support of Sullivan.
We hope to continue to demonstrate progress and customer attention and license and maintenance growth and accelerating our progress along the strategic and portfolio dimension to support the growing needs of our customers John Bob and I will now be happy to address your questions.
Operator, we are ready for questions.
And as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
Your first question comes from Matt Hedberg from RBC capital markets.
Hey, good morning, guys. Thanks for taking my questions.
The Doctor I wanted to start with you know we do have some distance now between the breach and where we are today.
I wanted to dig into a little bit about both the renewal and the new business side, obviously, 87% and quarter renewals were really nice to hear given where expectations were coming into the year, but are you hearing any customers both existing or potentially new customers that are unwilling to look at Sullivan products now following the breach.
Just a bit more diesel and that would be helpful.
Chalmette.
As I mentioned in my prepared remarks, I spent a lot of time with customers across <unk>.
Algraphy, there as well as the various sectors and sizes.
And we haven't described it as that.
Customers definitely want to understand what happened and like I mentioned earlier in the quarter a lot of the questions vetted out.
What happened with the security incident, and now I would say there is a level of acuity off the tee that up.
Customers appreciate that whats happening from a security breach standpoint to us could happen.
Adjusted them, but also see a lot more of the vendors coming out and speaking about breaches that are going on.
And in data environments, including some very large vendors as you know.
That doesn't become the main topic of discussion and instead, it's about the portfolio the value proposition and things like that so I haven't seen examples of customers.
Saying that they don't want to evaluate that in fact.
I would say that more and more of them are doing so.
And increasingly.
What I find is that we are having broader conversation so whereas previously we may have had <unk>.
Discussion with let's say a networking engineer and now we're having discussions with the CIO and the thesis so that gives us the opportunity to have more relevant than most strategic conversations with them.
Got it that makes a lot of non super helpful and then Bart.
You didn't provide a full year outlook, but you did give us some detail on some incremental labor costs.
Are there any other puts and takes that we should be thinking about I guess I'm thinking specifically on the margin side as we move throughout this year.
Yes.
Q1, EBITDA margin was a little over what we had originally expected and that and so and I think it came in closer to like 41%.
We're still we're still we still have a lot of some headwinds that we're facing and.
And the second quarter and if you look back at our historical book performance margins tend to rise and the back half of the year.
Lot of that is because of the increase in revenue and the second half of the year for US we don't like to talk about seasonality, but Q3, and Q4 are typically better quarters for us from a license revenue standpoint and.
And if that's the case. This year, then we would expect our margins to improve and the back half of the year as well.
Got it thanks, a lot guys.
Thanks, Matt.
Your next question comes from Sterling Auty with Jpmorgan.
Yeah, Thanks, Hi, guys. So.
The incremental cost that you're incurring for security operations et cetera.
You mentioned so the portion that you mentioned that we'll need to continue which is understandable I'm. Just curious is there going to be leveraged and that level of spend meaning is this the level that you will need to maintain or is there a variable component that will grow over time and maybe.
Mentally impair margin to some degree.
Yes Sterling.
Really the $20 to 25, it's not going to scale with our revenue.
It's fairly stagnant as far as what the costs are going to be on a go forward basis Theres. A few things are like penetration testing and fees and a few things like that or and that 20% 25 number that may increase slightly as our customer base increases as our it portfolio <unk> footprint and increases over time.
But it's not going to scale with the rest of our business.
Great and then when you look at.
The.
The improvement in new customer or new purchases are there particular parts of the product lines that are rebounding first and then.
Is there anything within the product line that youre, finding still lagging because of.
And a hangover from the breach.
From a product standpoint, and Sterling, we thought that delight, and where you would see that as and our license revenue.
And obviously, we talked about first quarter being the first quarter being our toughest quarter.
In 2021.
And really it was pretty much across the board.
As far as Dave what was down year over year.
Obviously, the Orion product portfolio.
Portfolio was the most scrutinized.
But from a product standpoint, it was really just across the board.
Got it thank you.
Yeah.
Your next question comes from Rob Oliver with Baird.
Great. Thank you good morning, guys.
Two questions first for.
Sudhakar for Bart.
Uh huh.
Little bit on the slower license growth this quarter maintenance, obviously it did pick up a part you had said in the prepared remarks that you were making priority, making a subscription a priority for the sales team. So just just wondering how do you guys approach customers.
On renewals I know the goal has not been to convert folks to subscription.
But has there been some changes.
Docker since maybe you arrive all about the approach to subscription and has that proved to be you.
You know a bit of a easing perhaps some of the.
The barriers, perhaps to renewal with some of your customers and is that happening in core T as well as in the SaaS portfolio and and then.
And I had one follow up for John.
Hey, Rob.
First and foremost as you said.
For our existing customers.
Maintenance renewal is.
As more attractive from a financial standpoint, so we're not seeing a hard shift of our existing customer base to go from maintenance to subscription.
The subscription sales of our on premise products are all to new customers and Thats still the case today and what.
We have done is starting with our database product portfolio of products.
Making that a priority from a subscription sales standpoint, as we move harder into that market.
Especially with the century one acquisition.
We're making that our initial on premise subscription products that were focusing most on and really and as we move into the second half of the year I think that's one of the areas that the doctor They make a private force suffered.
Absolutely and just are being closed and that point.
We don't want to make and that sort of moves so to speak on that front and bid.
And some very logically opportunities for us to translate more and more into subscription as Bob mentioned.
Specifically with the database portfolio and as we explore additional packaging options and integration options for <unk>.
And I put in the back half of the year.
But most of those appropriate indicators are a function of delivering more functionality and value to customers and then in that context also offering a greater leaning towards subscription even as we train.
<unk> said is in that context, we do have additional.
Call it incentives for our sales teams.
And that is something that we could continue to outlet amplify.
Okay, Great. That's really helpful. Thank you guys and then John I had one follow up for you you know just a couple of weeks here removed from the sell side event that you guys did and really appreciate all the color I know there were some puts and takes at least from the sales community around.
Profitability profile versus growth.
It does sound you know, particularly given the Tam expansion here, but I think doubling through 2020 five like there is no.
Meaningful growth opportunity along with I think as you guys said desire to be a rule of 50 companies.
Just stepping back now, but could you maybe just kind of frame, how you're thinking about that obviously without providing any specifics you can but how you're thinking about that kind of growth diversity and investment profile and if there's any change in recent weeks as things start to get a little bit better your emerging from some of the COVID-19 impact.
Yes, thanks, Rob.
And as I outlined in the prepared remarks, where we're going to continue to increase investment across three areas.
R&D international sales and customer success each of those have a different return horizon.
And if you think about it our international sales were investing there to land and some larger MSP and other and other parts of the world and also begin to plant our flag some of our channel partners I expect those to have a shorter return.
And we're actually starting to see progress and those and those geographies.
Already so that will have I would say is the shorter return and the second one around customer success, we continue to add resources and technology and processes to help our MSP partners grow their business.
And for them to add services for them to add customers and scalable way that day.
I've got a little bit more of a medium term return because we have to help them grow and as they grow we grow and then the last one around product as Sudhakar mentioned, we brought on our new RCT <unk> two.
<unk> technology and product officer, and he is looking at a bunch of different ways for us to improve the scalability of our platform, but also.
Add services to help these MSP and a little bit of a faster clip.
So as you think about it from a product strategy point of view, we have two one is we're going to continue to expand our surface area on things that we can monitor and we've demonstrated that this quarter with the adding of via <unk> and integration and the second one is adding services for these and.
Sps to protect to Smes and to do their jobs more efficiently that one and takes a little bit more time because of course, we have to develop and build them into our platform makes and MSP ready and then that cohort for that service begins to begins to add so it's.
Those are three areas, what I'd say is slightly different return horizons regional.
Great that's really good detail appreciate it John Thank you guys very much.
Your next.
Listen comes from Kingsley grain of Burberry capital management.
Great. Thank you.
Great to see continued traction and the database management portion.
Can you talk a little bit more about the accretion of this dedicated team and what.
Other teams from within the business team members and maybe coming from.
Yes.
So I was very specific and calling a core team. So the idea here is not so much too.
Hi, all from the functional teams, we have organized functionally across the board because we want to create a lot more leverage lithium product development and marketing and all the functions that we have however, what we have done is that.
And we have appointed a.
Core team leader and Bob Potter and.
And that has built a cross functional and virtual team.
That is focused essentially day to day on driving this business and so in many ways, we preserve the integrity of Firefox and team.
But also create the focus of our core team. So that's the idea behind this particular initiative and.
And this is a very scalable model from Mike.
Okay.
Okay. I appreciate that that's very helpful. And then one for John that's very positive commentary on that.
The growth drivers enable just wanted to touch on the growth outlook that you provided.
At the most recent analyst day, and so if we look at the.
And the results of a 13% growth and Q1 with a month, a pause and demand generation the force.
And 14% growth implied by the guidance for Q2, and then the total to 14% growth for the full year.
I guess, what should we make up the guidance and one of them.
<unk> for the back half and the year and if.
Was there anything else that we should be considering in terms of.
This growth outlook.
Yes.
And just to remind the audience. So we guided Q2 and $3 $584 million. That's it that's a 14% and for the year, we guided $3 40 to $3 44.
What we're expecting to see.
Pretty consistent.
Pickup and acceleration throughout the year I would say.
As we go through and continue to add on and get some of the returns from the investment that we continue to go through so.
And that's how we're thinking about it we'll continue to invest and some of the products.
We expect to hopefully have.
Couple of new offerings.
And that come on that add to the add to that to the help for our MSP. So that they can begin to add a little bit more and services, we recently announced.
DNS filtering offerings that will be integrated into our platform and those type of investments you'll continue to see.
And with or without with the hope that we'll begin to.
Get some return.
Both us and our MSP.
Okay. Thank you, so much and congrats and great quarter.
Thanks Keely.
And next question comes from Erik <unk> of JMP Securities.
Yes, thanks for taking the question.
I think you had mentioned.
And your comments about one time costs.
And why are you building costs.
And abilities.
And.
And what are the judgments.
Yes.
And then secondly can you comment and stuff.
And the products.
I think Kevin.
And kind of.
Yes.
Yes.
Okay.
Hey, Erika you are kind of fading out there at the end of day to ask the first question as it relates to the liabilities as of March 31, we don't have anything reported from a from a liability standpoint as it relates to the cyber incident.
We just didn't we.
We're fairly early on and that process of investigation.
And as of right now there's nothing that we've accrued at this point.
And I think your second question could you if you could repeat that I think it was something around our absorbability products.
Yeah.
Billy products were slow.
To start I think if you go back a year or so ago and I'm. Just wondering if those are starting to pick up for you.
Do you look at the competitive environment.
Good day to day.
And we really cause our inventories.
So yes on the subscription revenue side for that for the core piece of our business. Yes. We are still we're still evolving net product portfolio.
We are we're still moving into that space that is obviously going to be a priority for us and the back half of the year. That's one of the things that we're going to focus on.
So in 2020, the back half of 2020, and and and ended 2021, a lot of our focus has been on the span of the enable business and.
And the third ability products, Eric it's something that we'll talk about and the second half of the year, probably something that's a doctor and I will make a priority when we have our analyst day later this year as well.
Very good thank you. Thanks.
Thanks, Eric.
Your next question comes from Sandy.
Hi, guys. This is Melissa Dunn on for Sanjay from Morgan Stanley.
Thank you so much for taking the question.
Definitely so.
Couple of.
Step out and highlight here.
And it definitely a shift to cloud and certain segments, a better way to think about it one is that the one that is going to be hybrid for a very long period of time and Thats step one.
Step two is that even if you think about network monitoring on a services basis that is sticky and.
That is still a growth market, albeit not as fast growing and let's say APR cloud only market. So our strategy is to leverage our platform and be able to support the needs of both kinds of deployment and debate the Orion platform itself.
Evolving.
Through the integrated platform that I mentioned.
It will not only support monitoring as in net book system application and a debate monitoring but also be the single platform that supports.
Automation and monitoring alerting and then Vermination mid.
And <unk> products. So that's the evolution to think about and that's what gives us.
A lot of content and that we become more relevant to support the growing needs of five estimate.
Okay, and Thats really helpful. And then just last one and my and yeah. As we think about the cloud strategy going forward with and that.
Management side of the business are there specific areas of Inc.
And that you guys are focused on.
Okay.
A couple of areas that I mentioned the database.
Functionality and then we spoke about some of the recognition we're getting in the APM space Inc.
<unk> lead the way to think about how we are focusing our investment is on that integrated platform with integrated functionality across those four dimensions that I discussed so instead of looking at it product specific and maybe looking at the broader needs of.
Dev ops and tech ops professionals.
Got it. Thank you guys so much.
Thanks Melissa.
Your next question comes from Terry Tillman from to.
Sure.
Yes, thanks for taking my questions, maybe first the doctor or John.
The idea of returning to demand generation activities, but I'd be curious if we get the focus a little bit more on that because the reality is your sales cycles can be pretty quick I belief and both sides of the business quite T management and enable so what are some of the early things youre seeing from the return to demand generation activity in terms of the rebuilding and pipeline et cetera and.
And how quickly could that get back to kind of normal cadence on demand and and related volume and then I had a follow up.
Okay.
Sure.
Oh first.
And I reiterate what Bob highlighted in his prepared comments, which is that our performance throughout the quarter on both sides of the business.
Continued to improve through the quarter. So March was better than February EBIT was better than Saturday and that applies to the demand Gen engine is value.
And then the cyber incident to hit Us.
It's pretty much all hands on deck from our side and the op Ahmed due essentially to help our customers understand the impact and as you know Dave.
Vast majority of our customers, who had not impacted but EBIT. So we tried to touch as many customers as we could.
To make sure that David and safe and secure so call. It traditional demands and activities were not the main areas of focus, but then as we started stabilizing things and Q1 be turned out attention to imagine and.
As you know we have a fairly high velocity demand and and then and the way I would describe it is that demand and it normalizing.
Although we continue to focus on it from both and investment.
And activity standpoint to continue to help it grow because we have growth aspirations on both sides of the business.
Got it and and the second question and embark and it was helpful providing that kind of and quarter renewal rate of 87% that's great to see what I'd be curious and I don't know who this question is for the federal sector is a big part of your business and how is the resiliency Ben in that sector, specifically versus the other industries.
And what are you thinking going into the back half of the year, where we do have the seasonal strength typically thank you.
So yes, so the 87% that I provided and like I said, we expect that to actually improve a little bit more as we as we move through Q2.
Terry.
That includes our federal customers as well so that's both our commercial and that customers I will say that our fed business was slightly lower than that number that we're getting there for Q1.
But we also talked about the fact that we had our biggest customer renewed in Q1, and we've talked about that deal and the past and that's a bad customer as well. So so we are seeing engagement with our fed customers. We are having to work probably a little bit harder with that base.
We are but we are renewing that customer base as well and.
And talking to a number of customers I think coding.
And as proportionate amount of my time on the federal customer base, given the size and the scope that we have a net and many of the customers have done things back on and have renewed at Dubai at this point and also continue to expand we don't really break down specific renewal rates by segment.
We expect our commercial.
So continue to think about us and the and the blended context, and we add commentary as Vito.
Thank you.
And there are no further questions I'll turn it back to you for closing remarks.
I think we're done.
You folks.
This concludes today's conference call. Thank you for participating you may now disconnect.
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