Q2 2021 SolarWinds Corp Earnings Call
Okay.
Today's conference is scheduled to begin momentarily until that time that line. So I can be placed on music hold.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the solar wind second quarter 2021earnings call.
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It is now my pleasure to hand, the conference has it got off the hook.
Thank you Nicole good morning, everyone and welcome to the solar wind and second quarter of 2021free.
With me today are Sudhakar, Ramakrishna, our president and CEO, and Bart <unk>, EVP and Chief Financial Officer.
Following prepared remarks on the brief question and answer session. This call is being simultaneously webcast on our Investor Relations website at investors thought filler line.
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 the concerning our financial outlook the impact of the cyber incident on our business on market opportunities the impact of the global economic environment on our business and the related the recently completed.
Dave.
These statements are based on currently available information and assumption and we undertake no duty to update this information except as required by law. These statements are also subject to the number of risks and uncertainties, including the numerous risks related to the cyber incident and the recently completed spin off of the enable business.
Information concerning these statements and the risks and uncertainties associated with them is highlighted in today's earnings release and on and in our filings with the SEC copies are available from the SEC or on our Investor Relations website.
In addition, we note that our financial results for the second quarter 3 of the impact of the enabled business for the entirety of the quarter since the spin off was not completed until July 19, 2021 in today's remarks, when we referenced our ongoing solar wind isn't at the store.
Refer to our core management business, excluding enable 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 measure 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 the summary, slide deck on our Investor Relations website going forward, we will begin to present certain financial measures on a GAAP basis, only and with that I'll now turn the call over to the soccer.
Thank you Ashley good morning, everyone and thank you for joining us today, I hope, you're doing well and staying safe.
Wanted to start by first thanking our employees customers partners and our shareholders for the ongoing commitment to Sullivan.
Odd employees, we called out some hilarious continue to demonstrate excellence commitment to our customers.
As I outlined in the Q4 'twenty 'twenty earnings call customer of the attention is on number 1 priority in 2021, and we made great progress towards this goal in Q2.
I attribute the program with the dedication of our employees the relevance of our solutions to address customer needs and the commitment of our partners and customers the Sullivan.
We substantially completed our investigation into the cyber incident and published on findings and me and continue to apply the learnings by a secure by design initiative.
I have also had the opportunity to share our findings and public forums, such as the Odyssey zone.
And the UK Cyber security conference as well.
As with industry peers and government authorities around the world.
If there's an unfortunate the fact that no company, regardless of the size competency and resources it seems the immune to cyber attacks.
And by the recent high profile breaches.
In this environment, a pledge of transparency and industry collaboration remained strong and has been well received by customers partners and the broader industry as the accelerated our journey to deliver the simple powerful and secure solutions.
As a reminder, on sick care by design initiative focuses on 3 core areas first is to enhance the security of our internal environment and infrastructure.
2 is to enhance the security of our software based system and environment and third is innovating to enhance software supply chain bidding processes.
We devised a unique software based process that's performed across the 3 discrete environment with the.
<unk> characteristics and permissions.
This process results in a changing threat surface and of compacting, the that window, thereby making it more difficult for the 3 factors to break in and therefore, enhancing the integrity of our software supply chain.
This approach has resonated very mature customers. Many of whom are also developers of software and we are winning significant deals with customers and the direct result of this aspect of our secured by design initiative also at Spotify on ongoing efforts to make customer.
Most safe and take care of the plan to publish white papers and other materials the netback.
The industry at large.
I will now touch on a few financial and operational highlights in Q2 for our consolidated business for the second quarter, we delivered revenue well above the high end of the range of our outlook with total consolidated non-GAAP revenue ending the quarter at 260.
$2 million representing year over year growth.
Growth of 6% on.
Consolidated results include any of them for the second quarter, which we successfully spun out last month.
Second quarter consolidated adjusted EBITDA was $111.1 million, representing an adjusted EBITDA margin of 42% exceeding the high end of our outlook for the second quarter.
On Q2 ongoing Solomons maintenance of annual rate of 86%.
It's about the low to mid <unk> renewal rates, we noted we expected in 2021.
We continue to focus on customer retention as a key priority and hope to grow back to historically and best in class of annual rate of over 90%.
We secured the largest on premises total subscription deal in the company's history from a large healthcare provider in the United States.
This further validates our transition to a business with the higher subscription mix and the confidence that customers place in our portfolio roadmap.
Our consolidated subscription revenues grew 17% year over year without an ongoing sort of in subscription revenue growing 16% year over year and this gave you of our business. We've continued to be of 4 key focus of mine on an ongoing basis.
We are winning large public sector throughout the world in many of these customer engagements are secured by design initiative features prominently.
We are seeing that the comprehensiveness of our initiative as described earlier in my comments and its applicability to a broad range of customer environment is a key differentiator.
During the second quarter of 2021, we launched sort of database insight for sequel server expanding a comprehensive database performance management portfolio.
You know I think the features and functionality of the award winning Sullivan database of performance and lifestyle and sort of sequel century database of insights of a sequence of of Cowen.
The in depth performance and environmental data teams need to optimize the performance of Microsoft Secret server and other leading database platform running on premises in the cloud on in hybrid environments.
Our products and services received more than 35 of industry and customer awards in the first half of 2021.
Notably trust radius named 19, Sullivan's IP operation management products at 2021 Top rated award winners across 13 categories.
And the company's commitment to customer support and success was on it through 5 Stevie Awards.
We continue to attract excellent talent across all functions of our organization.
People see the opportunity we have the mission and strategy to address what we believe will be of 100 billion dollar market opportunity.
Last but not the least we reached another significant milestone by completing the spin off of on managed services business.
Now known as enabled on July 19th 2021.
By operating as 2 independent publicly traded companies, we believe that's sort of ins and enable we'd be better positioned to align with each other as market needs and customer requirements enhancing the successful operations of.
All the companies in the future.
With that I will turn it over to Bob to provide more details on our financial performance and outlook.
Thanks to the Doctor and thanks again to everyone joining us on today's call.
I will discuss our second quarter results on a consolidated basis consistent with what we have discussed in the past.
I will also provide some supplemental information related to the ongoing silhouette.
As most of you know our spinoff of the enable business occurred last month on July 19, therefore.
And therefore enables results are included in our second quarter financial results and our second quarter guidance assumes enable results for the full quarter.
We are in the process of preparing carve out financial statements in the future periods, our public filings will present enable as discontinued operations.
Our second quarter financial results reflect solid execution, while demonstrating the resiliency of our model.
That execution led to another quarter of better than expected results and finished well above the high end of the range of our outlook for the second quarter with total non-GAAP revenue ending the quarter at $262 million.
Representing year over year growth of 6%.
Total enable revenue for the second quarter was $85 million.
Representing year over year growth of 16% the ing.
Enable management team will talk about their results and a separate earnings call on August 12.
Excluding enabled total ongoing solar once revenue was $177 million.
Above the high end of our second quarter revenue outlook of $175 million to $174 million.
Total license and maintenance revenue was $149.5 million on the second quarter, which is flat with prior year.
Maintenance revenue was $123 million in the second quarter up 5% versus the prior year.
We typically disclose the maintenance renewal rate for our perpetual license products on a trailing 12 months basis.
Which was 90% through the end of the second quarter.
This includes more than 2 quarters of renewals since the Thailand.
Also consistent with the first quarter.
On the in quarter renewal rates of the book.
Yeah.
Our second quarter in quarter renewal rate is currently at approximately 86%, which again is above our expectations at the start of the year.
Our primary focus for the first half of the year was to ensure that our customers recognize our efforts related to our secured by design commitment and trust us to help them transform faster and increasingly hybrid it world.
We believe our renewal rates so far in 2021 demonstrate that trust.
For the second quarter of license revenue was $26.7 million, which represents a decline of approximately 21% as compared to the second quarter of 2020.
On premises subscription sales resulted in an approximately 9 percentage point headwind to our license revenue per the quarter.
The remainder of the decline in license revenue reflects the combination of the impact of the security incident include.
Including our decision to pause demand generation and customer acquisition physician activities from December through the first quarter as.
As well as the continuing impacts of the COVID-19 pandemic.
That said, we improved our new license sales performance sequentially and the year over year decline on the second quarter is an improvement from the year over year decline in the first.
We saw acceleration of new license sales in our commercial business in the second quarter.
We are working to continue that trend as we move through the through the rest of the year.
Total ALR ratio of approximately $992 million as of June 30.
The reflecting year over year growth of 14%.
Our ongoing total wins.
<unk> represented $640 million out of that total at the end of the second quarter of.
Ongoing solo and <unk> grew 12% year over year.
Due to the incremental revenue from century, 1 the century, 1 acquisition in the fourth quarter of last year, and our continued focus on retaining our maintenance base.
Moving to our subscription revenue.
Quarter consolidated non-GAAP subscription revenue was $112.5 million up 17% year over year.
Of which $82.8 million was from the enable business.
Our ongoing solar wind subscription revenue was $30 million in the second quarter, which reflects 60% year over year growth.
This is an area of our business.
Okay.
We finished the second quarter of 2021 with 1107 customers.
And more than $100000 for the last 12 months, which is a 16% improvement over the previous year.
We are continuing our efforts to build larger relationships with our enterprise customers and our ongoing solar Wednesdays.
We also had a solid second quarter of non-GAAP profitability.
Quarter of consolidated adjusted EBITDA was $111 million, representing an adjusted EBITDA margin of 42% exceeding the high end of the outlook for the second quarter and the Unlevered free cash flow improved in the second quarter total cities.
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Excluded from EBITDA and the Unlevered free cash flow are onetime costs of approximately $24 million, including $13 million of spinoff related costs and $11 million of cyber related remediation containment investigation and professional fees net of interest.
I do want to clarify the day cyber related costs not included in adjusted EBITDA or 1 time, Inc.
They are separate and distinct from the secured by design initiatives, which are the EBIT using our ICT.
Chain.
Cost related to our secured by this on initiatives are and will remain part of our recurring cost structure on a go forward basis.
We expect the onetime cyber related cost of fluctuate.
But to be less in future periods.
In the first half of the year.
These onetime cyber costs all of our however are difficult to predict the.
They not only include the significant cost of the forensic investigation efforts, which we substantially completed in may but also costs associated with our ongoing litigation government investigations any potential judgments or fines and related professional fees.
We expect our insurance coverage to offset a portion of these expenses and will be presented net of any insurance proceeds received.
Our 1 time spin related costs will continue through the third quarter as we finished the legal on accounting compliance work associated with the spin as well as the ongoing work associated with separating our internal systems and connection.
Net leverage at June 30 was 3.2 times, our trailing 12 months adjusted EBITDA.
Total wins will retain the full amount of the $1.9 billion in term debt.
On July 30, we completed a 2 for 1 reverse stock split and declared a dividend of $1.50 per share on a post the split basis.
Which we will which will be paid on August 24, primarily from the approximately $236 million of cash that was distributed by enable in connection with the spin.
In addition, enable will repaid $325 million of intercompany debt.
The ones, we will retain that cash on our balance sheet for the foreseeable future.
And as a result of this repayment, we expect our cash balance to be approximately $680 million at the end of the third quarter, bringing our net debt to approximately $1.2 billion on a post spin basis.
I will now walk you through our ongoing sell the ones outlets before turning it back over just the doctor for some final thoughts.
Consistent with our guidance for the past year, we will only provide third quarter of strategically on outlook for total revenue adjusted EBITDA and earnings per share.
We are also only providing guidance as it relates to our ongoing silver ones business, which is what remains after the spin off of an equal.
For the third quarter of 21.2021, we expect ongoing so the wins total non-GAAP revenue to be in the range of $176 million to $180 million, representing a year over year decline of 3% to 5%.
Adjusted EBITDA for the ongoing silicones business for the third quarter is expected to be approximately 75% to $72 million, which implies an approximately 40% adjusted EBITDA margin.
As a reminder, our EBITDA margin forecast includes the incremental spending associated with our secured by the non initiatives.
Our ongoing investments in our international sales teams and database management products and the continued evolution of our subscription model.
Non-GAAP fully diluted earnings per share is projected to be approximately 27 per share assuming an estimated $160.2 million fully diluted shares outstanding which reflects the reverse stock split completed on July 30.
Finally, our outlook for the third quarter as soon as the non-GAAP tax rate of 22% and we expect to pay of approximately $7.5 million of cash taxes during the third quarter of 2021.
The third quarter out the outlook incorporates a few factors first as we discussed during our third quarter of 2020 earnings call. Our federal business had 1 of the stronger quarters in our history, creating a tough compare for that reason, while we continue to grow sequentially of new license sales to our federal customers. In 2021, we are not expecting results.
Like the prior year.
The second is that maintenance revenue reflects the impact of lower new license sales since the start of the pandemic in early 2020 as well as our expectation that the renewal rates in 2021 will be in the mid <unk>.
And finally, our third quarter outlook reflects the continued transition of a portion of our new sales to on premises subscriptions.
While we are not providing full year outlook I will say that we expect new license and subscription sales in our commercial business to continue to improve in the third quarter and as we move into the fourth quarter of which is usually usually our strongest quarter of the year for new bookings.
Based on what we've seen so far in the first half we expect that the maintenance renewal rates will be in the mid <unk> for the rest of 2021, and we are targeting to return to historical performance in 2022.
We intend to continue to expand the sort of subscription offerings of our on premises products in 2021, and 2022 and make new subscription sales a much higher priority with our sales teams.
As we think about our EBITDA margins for the rest of the year and into 2022 the.
The costs associated with our secure but it's on initiatives investments in transitioning our product portfolio to of a greater subscription mix and our continued investments in our sales and marketing initiatives are factored into the margins in the short term.
We continue to remain committed to accelerating margins again in 2022 and beyond.
With that I will turn the call back over to the Doctor for his closing remarks.
Thank you bought our team's confidence commitment and the attitude continues to be evident as we delivered a strong Q2 performance and results exceeding our outlook in both revenue and EBITDA.
Executing on our mission.
Estimates accelerates their business transformation via a simple path.
And take care of solutions for hybrid it environments, we believe consolidated platform.
And get the capabilities and our commitment to customer success and has had the ability to be relevant to customers and enhance the lifetime value potential of our <unk>.
Customer base.
For the remainder of 2021, our focus will continue to be on executing on the initiate this debt.
<unk> outlined during our Q4.2020 earnings call.
Focusing on customer retention and demonstrating ongoing progress in subscription license and maintenance kind of across all geographies and sectors. Additionally, we continue to call on a long term strategic portfolio and module. We look forward to posting you all put in analyst day in.
Q4 of this year, please stay tuned for additional details.
I conclude again by thanking our employees partners and customers for their commitment to Sullivan, we hope to continue to demonstrate progress across all dimension of strategy and operations as we execute our second half plans and into 2022 <unk> now we'll be happy to.
The address your question.
As a reminder, if you'd like asking out of your question you may do so by pressing star and the number 1 on your telephone keypad again that the star 1.
Just a moment.
The first the question will come from the line of Matt Hedberg with RBC capital markets.
Hey, it's Dan Bergstrom for Matt Hedberg, Thanks for taking our questions.
Could you talk a little bit about customer retention, obviously, a key focus here. The renewal rate continues the track ahead of that kind of of the low to mid 80% figure you provided in February what's the.
And that and then.
What are you focused on doing or is it more just more time needed to move back to that historical 90 per cent range.
Matt This is Ted I'll kind of take that question. The first thing I would highlight is the commencement of the employees to customer success, we have been engaged of it.
The customers constantly and we continue to be engaged with customers constantly.
The second is the relevance of <unk> to customers.
As the engage with us understand of what happened as well as understand the initiate the is that we have taken that I call. It would take care of by design.
They seem to appreciate not only the value that the product being to them, but also the commitment that we have for the safety and security of the customer environment at large so those of 2 contributing factors I would think the commitment to find employees, but element solutions Inc.
Of what it would take to get back to historical levels of.
This is basically going to be of journey, Matt which is.
In the first half of this year quite literally and also into Q3 customer engagement and customer retention has been non priority and as customers come back up online David B, sometimes delays in terms of better evaluation processes.
As in the at any 1 of the processes and so on and so we've factored all of those when we came out most of the mid <unk>.
The annual rate base as you noted are obviously trending better than what we protected and so our belief is that we continue on that path going forward into 2022 and beyond.
Great. Thanks, very helpful. And then could you talk to the linearity trends in the quarter.
The difference from what you'd expect as far as you know building on the first quarter and then you know.
July is complete at this point anything to note as far as.
Third quarter trends. Thank you.
So what I'd highlight is reinforced by the comments that.
Quarter after quarter month. After month, we are seeing progress across various parts of the 5 business as well as maybe the geographies I'll also highlight that in Q1 net for the most part we did not pursue of demand generation activities because of our <unk> priority in the main priority.
It was to help customers stabilize their environments. It was only later into Q1 that we the initiated so to speak on the mandate activities and those are gaining more momentum as the go through the through the year and so that would continue to have a meaningful impact into Q3 and Q4.
We'll take the next question.
The next question comes from the line of Sterling Auty with Jpmorgan.
Yeah. Thanks, Hi, guys I apologize if I ask you to repeat some things where we're juggling multiple calls, but when you talk about the renewal rates you kind of talked about continuing in the mid eighties, but what I'm curious about is maybe some of the commentary that you heard back from customers It doesn't sound like the.
There was a material uptick in the quarter, but how would you characterize what you did see relative to what you expected coming into the quarter.
Yes Sterling.
I mean, as we said our Q2 in quarter renewal rate is currently at 86%. This is this is <unk>.
System with what we did in Q1 may be slightly lower but not necessarily what we didn't what we it's not out of line with what we expected.
When we send out renewal quotes we send those out in the 90 days ahead of time. So Q1 was in flight from a renewal standpoint at the time of the cyber incident. So that's 1 of the reasons why we expected Q1 to be better maybe than the rest of the year is because we knew that sort.
None of our base had already renewed.
So as we move through the rest of the year. It's why we continue to say that the renewal rates would be in the in the mid eighty's low to mid eighties as we move through 2021, even though the the first quarter was a little higher we were we were very pleased with the fact that we are now at 86% on in quarter renewals for the second quarter.
We also know that the rest of the year is going to be.
Will be still be a challenge for us, but it is our number 1 focus on its our number 1 priority is maintaining the core customer base.
And Sterling just to add to Bob's comments. He noted in his prepared remarks that the training 12 months of annual rates are at 90%.
So 1 thing I would highlight in this environment on the reason why we gave a full year outlook in terms of the approach to the annual rate is that every quarter different set of customers come up for renewal and as we've engaged with them.
Debt environment has become more and more stable.
David inevitably be some cases, where customers can take the Olympics extra time to renew compared to call. It.
Historical trends and so we are trying to factor all of those and that's the reason why.
The times to go back and update the of annual rates beat for Q1 on previous quarters as well.
Largely to the upside.
Understood and then on the margin front, you kind of gave the 3 areas of investment that you're making but I wanted to make sure I understand what ones of those do you expect to be kind of temporary investments and maybe give us some order of magnitude, where we should see increasing.
The leverage off of whatever spend we're going to see next quarter and what ones are going to be kind of continuing to invest maybe at a range. That's similar to gross so we don't get as much leverage.
Yes, so starting with when we talked about the secured by design initiatives.
On the previous earnings call, we talked about those the costs associated with those being in the $20 million to $24 million range.
We think it's going to come in and maybe at the lower end of that number but those costs that incremental cost is going to be and our ongoing cost structure.
Those are things like the increasing.
Some of our head count in our R&D organization around our supply chain process. Some of the penetration testing and some of the other things that we're going to do from a systems standpoint.
To enhance our it structure things like that are going to be just part of our ongoing structure, but hopefully.
The cost of sales those costs are not going to ramp as our business goes up.
Those are just going to be cost it will be built in.
The costs associated with some of the things that we also talked about and that is.
Enhancing our international sales teams.
Some of where we've seen some.
On some.
The positive results in 2021 has been outside the U S.
And we're going to continue to invest in our international go to market motion.
We also believe that the database market is the market of opportunity for us.
Not just this year, but as we go into 2022.
And so we're going to continue to invest in that market as well and we hope that those investments will scale as revenue grows over time.
Understood. Thank you.
Thanks, very much the question will come from the line of Kim.
The <unk> with Baird.
Yes.
Alright, Thanks for taking my question. So on July 9th year of release.
A border ability for sort of your ore hotfix for that sort of really so could you. Please tell us about how many customers were impacted by this and how the customer conversations are growing.
I'll take that.
Yes, we did issue a patch for the 1 of the ability the way I would characterize that as that Inc.
Obviously, nothing sort of with the funded sunburst reset we posted back in December of this is a typical on.
Unfortunately, typically the zero day volume of ability that ethics.
And other software vendors and this has been the example, I would cite of the Kennedy research community and the vendor community that includes the US working closely together to understand possible vulnerabilities and getting ahead of the curve by patching and releasing that the customers. So the way of.
Describe the customer support aspect and feedback is like with any issue, but it's the quality issue on a security issue.
So actively the starter customers help them with any download.
That they had in upgrade needs that they had but in terms of the customer support the volume I would not say that it was anything unusual of photos for them.
Okay, perfect Thats very helpful with the true.
Yeah.
The next question will come from the line of.
<unk> with Morgan Stanley.
Yeah.
Good morning, Thank you for taking the questions and congrats on the enable spin I had some questions on guidance. So if we look at this quarters results total revenue was up 2%.
Next quarter, we're looking for a decline of 3% to 5% I was wonder if you can help me sort of bridge that given the.
The consistency on the maintenance renewals side that you're expecting and then also from the maintenance IRR side on the core I'd business that was up quite healthy I think of 11%.
In Q2, so any sort of context, you can provide on why the business would go X growth in Q3.
Okay.
Definitely signs of that I felt like some color and I'm barclays' jump in.
Needed as well.
The first component I would highlight is that.
That is a ongoing focus within our business to evolve to do subscription and so we are going to have some headwinds associated with subscription. So that's 1 factor that I'd highlight too as we accounted in module for our Q3 bookings.
We have to keep in mind, the federal sector, where we continue to make progress even on a sequential basis, but last year's February quarter of Q3.2021 of the largest in our company's history and so we had a very tough compare.
Associated with that and then the third factor that we accounted for although renewal and maintenance rates continued to improve.
Is the factoring in the the fact that in 2020 due to the pandemic new product license sales.
The tepid and so we are modeling.
The annual rate and many of those dollars associated with that particular effect so the cash.
Combination of these 3 things is what causes us to predict but maybe on and obviously as.
Bob highlighted continue to focus on our commercial business continued to demonstrate progress month after month quarter after quarter.
And it does the us want to reiterate our maintenance revenues for us is more of a trailing indicator of our business. So.
We're somewhat youre going to see some slowdown in our maintenance revenue.
Primarily because of the bookings and what's happened to our licensed bookings over the last 4 to 6 quarters Youll.
Youll start to see that in our maintenance revenue. So you won't see a reacceleration in our maintenance revenue until we start to factor in more of these quarters, where we're growing license revenue year over year.
Understood.
And stuff and you make a good point on the subscription transition if you could talk about sort of the unit economics of the subscription transition it sounds like we're about 120 million raw fish.
Subscription of air are growing on a pretty healthy clip.
Even if you account for the acquisition in terms of sort of the year 1 impacts for the customer.
What does that revenue headwind look like and what the what is the sort of revenue breakeven timeframe is that sort of the 2 year 3 of could you just sort of review of the basics of the of the subscription transition for us that'd be helpful.
So sometimes it's first of all of we are making of Cigna.
Significant progress in the subscription business as we noted in terms of unit economics and call. It.
Tom.
The baby would be looking at all the economics is typical of the suffering badly so think of it as a 2 to 3 year type.
All forward type model.
Understood.
The change it if you remember when we price our subscription offerings are on premise of subscription offerings. We looked at the 3 year value of the license and maintenance model, we divided that by $2.75, and that's how we derive what our subscription pricing was going to be.
Yes generally of the model that we're following and then so the subscription booking is going to be obviously less than what a new license of maintenance booking would be a net year 1.
There is a little bit of an upfront component to the subscription revenue.
And we will talk about some of these things in more detail on that our analyst day that the debt.
Debt Sudhakar talked about earlier on we will also be able to talk a little bit more about how the what we think that impact the in 2020.
Understood. Thank you so much.
Thanks.
The next question will come from the line of Kirk <unk> with Evercore ISI.
Hi, yes, thanks very much that's the Doctor can you just talk a little bit about how conversations are going in terms of customers now maybe thinking about your on prem versus cloud.
On the management I was just kind of curious if you've seen any real change in that trend, obviously, new licenses were up sequentially. So that's good so it doesn't seem like it's changing too fast, but we're just kind of curious about how those conversations are trending would be great. Thanks.
Definitely so.
The 1.
Choice in this particular category.
So the way I would describe this is that hybrid is probably the way to think about the world.
As we move forward, it's not a matter of <unk> only are.
Cloud only.
So what customers are really looking for is a platform that can support the evolution of premises.
2 of the cloud as you would see.
Our upcoming part of packaging pricing of models, we are going to get greater comfort the customers as the Teva has this journey of premises to cloud into a hybrid and.
And so more and more of our conversations at all other.
That aspect of it.
Going into too much detail, Dave also nuances between even in the cloud context, whether things are cloud native versus cloud managed.
And we are working on solutions that on both of those in fact out what I would say is that the combination of.
Take care of by design initiatives as well as the articulation of our portfolio of roadmap to customers is giving them confidence that we can be a vendor that will not only support their needs in the current context, but also as they evolve more and more towards the cloud and containers and hybrid applications ecosystems.
Really helpful. And then maybe just want to park.
We think about the third quarter. You mentioned, obviously you guys have a tough federal comp coming up I was just wondering how you think about sort of the the federal impact.
The impact maybe on the maintenance rates are if you feel better or worse about that particular segment of your population or as you can't talk about specifically, but after we get through the third quarter should we feel like you guys have gotten over the share do you have on I guess of better view of ongoing maintenance rates once we get through the sort of big seasonal quarter of fuel.
Yeah, I mean the.
Debt businesses is it is it is a big piece of our business, but it's not it's not what I would consider.
Significant it's not massive.
It will have an impact on us in the third quarter. It's 1 of the reasons why even though our renewal rates had more of it in the high eighties, we still wanted to say be somewhat conservative guidance renewal rates to be in the mid <unk> for the rest of 2021, just because that number is a blend of both of our commercial and our federal business and so we know there is going to be some impact on the third quarter is it.
<unk> pillar of fed customers.
So that's the work that's why we've guided on like I said to the mid eighties.
We are going to push harder and we hope to do better than that.
Think we've ended Q1 at like 89% on the renewal rate from our renewal rate standpoint, and we think the age of 6% for the second quarter has some room to improve as well so we're going to always push for more but.
But that's because of the fed business in the third quarter. That's why we are guiding to that mid <unk> for the rest of the year. We do think that this is the 1 year phenomenon for US we do expect to get back to what our historical levels of band when we get into 2022 and.
And we think the mood of subscription for us will be positive as well because it will give us the ability to land and expand customers and a much easier fashion.
Thank you.
The next question will come from the line of Rob Oliver with Baird.
Great. Thank you good morning, guys.
Soccer I was wondering if you could just share a little bit about your philosophy around the product evolution of the platform. You. You. You know you had mentioned that you did play at the call of the portfolio a little bit I know you guys have also been opportunistic in the database seems to be an area, where you could continue to be so but just wondering if you could talk a little bit about your philosophy.
Lots of fee on on on how you'd think about the color.
Net portfolio.
Sure I would.
I would probably not to use the what kind of in this context as much is how do we consolidate capabilities such that our value propositions to customers become more crystal clear and compelling so in that vein in the near term.
I would say near term, let's call it a couple of quarters off of.
This will be on better integrations, and better packaging and pricing of our portfolio of so on 1 hand that the improve our asp's, possibly but the on the other hand anywhere of more compelling value to customers. So that's the first step but continuing on that said we are working.
Fast and furious I would say on a hybrid platform that will be a singular platform upon which all of the <unk> capabilities will be delivered so in this regard we can support a land expand penetrate motion much more successfully with the customers as opposed to of having been deemed.
The multiple point products. So the inefficiencies for the customers at 111, but Theres also in terms of RMB efficiencies, because we will all be working on 1 platform 1 set of user experiences.
Assistant with our commitment to deliver not only powerful and simple solution, but also take care of figures.
Got it.
That's helpful. Thanks, and then just the follow up on that 1 just on on the century, 1 business in particular.
Wondering if you could talk about you know the database of opportunity of database trends and then Butte.
Beautiful 8 route the that I think at 1 point I don't know if this was just public speculation about whether that would stay with you guys or go with the neighborhood is enabled going to remain a large customer per century wanted if you could just maybe help us understand that I'm not sure maybe we'll get more color at the analyst day, but any thoughts would be appreciate of depressed.
Sure.
Sure first of all.
On.
Since the 1 is very much part of ongoing sort of <unk>.
Step 1 step.
Step 2 is that.
While the <unk> 1 is may be significant to us from a sequel.
Database environment standpoint.
Elements also had incredibly powerful database solutions price et cetera, you might as well and so 1 of the key strategic things that we have done is integrating database portfolio of effects that we have the broadest portfolio to support the most number of platforms Outback beat the secrets of.
The article.
Congrats on others.
But also be able to deliver them in search of fashion that customers can deploy them either on premises on in the cloud.
So that particular set of the integrations is already complete.
And the most recent thing that I announced in my prepared remarks was the extension of those capabilities on database insight, which is an extended motion that <unk> are engaged with customers as we speak.
Great. Thanks again guys.
Yeah.
The next question will come from the line of Terry Tillman with tool.
Yes, good morning. Thanks.
Thanks for taking my questions I guess the Sudhakar. The first question is just related to the largest subscription deal to date I guess you commented on with the health care provider could you spend a little bit more light in terms of what product or products that day, they bought and and and how is the pipeline for large subscription deals and then out of the follow up.
On the on the first part of your question that was a.
A great example of a customer who is EBIT to leverage a broad swath of op portfolio. So it wasn't like 1 particular product electrical the network performance monitoring as an example, but it was actually a combination of our <unk>.
So elements to support the broader needs. So this also relates back to the point that I was making about it in the next couple of quarters, you will see us packaging solutions.
The pricing them in ways that maybe more compelling from a customer standpoint, and so what you will see is that more of a packaging of <unk> the customers, where they are not only consuming a fine product, but that are able to solve multiple solutions and the solutions could be application of monitoring integrated with <unk>.
Debates monitoring as an example, or a combination of network management and database matters, but the in the same environment. So increasingly you will see that and then that will not necessarily culminate, but the lastly evolved into that hybrid it platform that I mentioned with regards to your question on the pipeline the way.
The address is that subscription selling and proposition.
He's a heightened area of focus for our sales teams in coding.
The incentive structures do simple then promote that.
Okay, and then Bob maybe just a follow up thanks for the commentary on the $30 million ongoing subscription business I think it was up 16% year over year as we look into <unk> I mean anything at all you can share on how this ramps from 30 million. Thank you.
Yes.
It is it is being impacted by the century, 1 acquisition that we closed last year in the fourth quarter. So the $30 million is going to have some increase in Q3, just because of the century 1 deal on that closed in November of last year. So you will see a little bit of a slowdown as far as the growth goes because of the acquisition last year.
And really the growth will be driven by what what how how effect of our sales forces and transitioning some of these opportunities into subscription deals.
Not going to be.
It's gonna be of customer led decision, we are going to try to get our sales force incentives to push the subscription deals but the.
The heart shifted.
<unk> has yet to occur.
Yes.
[noise].
Yeah.
Yeah.
We'll take the next question.
Next we have a follow up on Sterling Auty with Jpmorgan.
Yeah. Thanks for squeezing me back in.
Getting a number of questions from investors around the fed business I know you haven't broken it out on specific but we're going to push a little bit. So when you back out the MSP business, how would you characterize the size of the fed business. That's left that's.
The 1 number 2 can you quantify how big is the surge that you that you saw last year and 3.
The people expect a pretty healthy spending environment out of the government. This year as well why do you think debt.
Perhaps wouldn't repeat itself.
Yeah.
So you know what type of business Sterling, we've talked about it in the past in the third quarter.
I would say.
It's it's.
<unk>, 10% of our of our total revenue base when we're looking at what the annually what is on.
<unk> available to renew our fed business is somewhere in that 10% range.
As you know our federal customers are not 1 individual customer it's a bunch of individual users within the federal government, we talked about our 1 big customer in the first quarter that is our single largest customer by far the rest of our of our business is made up of smaller individually.
Agencies within the federal government like I said so.
We're thinking about it from a total revenue standpoint.
Approximately 10% when you when you add up all those different customers.
As far as the third quarter goes for us.
Biggest impact to our business from the cyber incident was the noise within the federal government.
So therefore conversations with the federal government in any of the agencies within the state of federal government.
Has been a little slower for us.
And has been where we've gotten the most.
I would say if you wanted to say pushback, it's been within the federal government.
Understood. Thank you.
Yeah.
We'll take 1 more question.
My question was high Boy, Eric the Pizza.
JMP Securities.
Yeah. Thanks for taking the question.
Just trying to understand where you are in terms of your focus on lead generation versus the customer retention.
I understand you.
Started your lead generation efforts of the end of Q1 are you doing all of your traditional.
The campaigns for 4 of driving.
Leads of generating incremental business or where are you in terms of the ramp and then can you talk a little bit about what profiled customer is most at risk for sure.
Just noticed the federal.
That's probably the highest churn of the sector, but what types of customers do you see that our most reluctant to to redo.
Yes, So let me let me address that first I want to provide of point of clarification on the net churn.
Churn comment that you made.
I don't think be of highlighting that they have the highest propensity of what the shut in as much.
They tend to be the most conservative customers.
2 of bringing things back on line.
Helping them working with them.
<unk> stabilizing debt environment.
The average meal covered.
Quite the clarification to your point on demand generation.
For the most part in quarter..1 we did not have normally the managed separation activity that was early data into Q1 that we started ramping those back up and I would categorize them as the steady state today.
With regards to what customers are having the highest per package you can see the VA.
I would describe it is that every 1 of our customers the super.
Super important large or small regardless of sector.
But in terms of.
Are we seeing a specific pattern of shown on the E. A specific customer segment.
The short answer is no quite simply because we do not have a lot of churn based on what we are seeing with customers and even when we do that isn't enough of a sample set to give you a peg of the various payment.
Okay very helpful. Thank you.
I think that's it for us and we're going to land in the call.
Thank you.
Yes.
This does conclude today's conference call the thing.
Please disconnect your lines.
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