Q3 2021 SolarWinds Corp Earnings Call
Percent exceeding the high end of.
Yes.
As I outlined in the Q4 2020 earnings call customer retention is a top priority in 2021, and we continue to make great progress towards this goal in Q3.
Our Q3 maintenance and annual rate of 88% well above the low to mid 80%. Then you wouldn't really be noted we expected in 2021.
Customer retention remains a key priority and with our growing portfolio of offerings. We believe we havent great opportunity to continue to grow our MTV and net retention rates with our large customer base.
We continue to offer a flexible pricing books using options to our customers by increasing our focus on subscription bookings and we expect to continue to increase our mix of subscription in the upcoming quarters and years.
In Q3 subscription revenue grew at a 20% year over year rate with subscription are aren't growing 23% year over year.
Bartlett you provide more color on how this part of our business will trend in Q4 and beyond given the skew the century, one acquisition timing.
We completed the successful spin off of the enabled business in July and that has enabled us to plan and execute our standalone strategy. The details of which we look forward to sharing with you at analyst day.
A global system integrator and enterprise motions are resulting in larger subscription piece.
Let's see here is that customers are investing in our entire solutions offering and taking advantage of a simplified packaging and pricing.
These solutions are the underpinnings of our upcoming Sullivan Absorbability solutions, which we look forward to sharing more details about at the analyst day second.
We will also highlight our views on that.
<unk> potential to be a growth driver in the coming years through a comprehensive and differentiated approach to observe ability compared to the alternatives.
Ophthalmic teams made significant progress in Q3, delivering new elements within our solution.
Designed to drive additional value to our customers based on their evolving needs.
Including updates to our database and ideas and solutions as well as secure by design initiated that impact our entire product portfolio.
They extended the breath of our database monitoring portfolios platform support, which now includes Google cloud extensions and added enhanced integrations, including with Microsoft teams.
Ips M solution.
Increasingly our application database and <unk> offerings will become integrity elements of Sullivan's observer ability and we create at.
As he supposed to customers of all sizes with the I T Dev and SEC opposite of quantity.
We believe that this will differentiate our offerings from all from those of the other vendors.
We are expanding our global partner engagement with events in various geographies.
Joe with partners, including Gsi's cloud service providers, and MSP are critical to extending our TTM reach and to jointly deliver customer success.
Created offerings with rich enablement incentives and the spirit of mutual accountability are the underpinnings of our partner strategy.
In September <unk>.
Celebrated the seventh annual <unk> professional today policy, which was originally established by Sullivan in 2015.
Pro de recognizes and celebrate.
All our it professionals and the contributions they make to their business every day.
As part of the celebration, we released findings from a pro data 2021 survey lingered on.
Richard Reid, <unk> confidence and pride in their rooms.
We were also able to recognize for it professionals nominated by their peers and our second annual IP probate of what we believe that perfection show the true grit under challenging conditions, this past year and deserve recognition and appreciation for their efforts commitment and the XE.
Yeah.
We continue to attract excellent talent across all functions of our organization and we are selectively adding footprint in international regions, including most recently in South Korea, and fortify EMEA region.
With that I'll turn it over to Bob to provide more color 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 <unk> results on a standalone basis.
As most of you know our spin enable business happened earlier this quarter and was effective on July 19th.
Therefore their results are reflected as discontinued operations in our third quarter financial results.
Also a quick reminder, that the guidance for the third quarter that I provided in August did not include any impact from enable us to spend had been completed at that time.
Once again, our public filings will present enable as discontinued operations in the third quarter as well as in prior periods for better comparability.
Our third quarter financial results reflect another quarter of improving execution, well demonstrating the resiliency of our model.
That execution led to another quarter of better than expected financial results for the third quarter with total revenue ending at $181 $3 million above the high end of our total revenue outlook of $176 million to $180 million for.
For the third quarter of 2021, there was no impact of purchase accounting on revenue. So our non-GAAP total revenue was equivalent to our GAAP total revenue.
Total license and maintenance revenue was $149 million in the third quarter, which is a decrease of 6% from the prior year period.
Maintenance revenue was $120 million in the third quarter, which is up slightly from the prior year.
Our maintenance revenue has been impacted by a combination of year over year declines in license sales for the past eight quarters and a reduction in our renewal rate in 2021.
The trend of lower license sales intensified with the COVID-19 pandemic in the first quarter of 2020 and because of the introduction of subscriptions of our licensed products in Q2 of 2020 as well as December incident.
December of 2020, as we focus more of our efforts on longer term customer success and retention rather than maximizing near term sales.
Although maintenance renewal rates have remained lower than historical lever level. Since numbers. We are encouraged by the fact that they have improved throughout the year.
Our expectation is it started to get or was that maintenance renewal rates would be in the low to mid <unk>.
On a trailing 12 month basis, our maintenance renewal rates its 89%.
Working with our customers has been a top priority this year.
Also consistent with recent quarters, we want to provide the in quarter renewal rate for the third quarter, which currently stands at approximately 88%, which again is above our expectations at the start of the year.
For the third quarter license revenue was $29 2 million, which represents a decline of approximately 26% as compared to the third quarter of 2020.
On premises subscription sales resulted in an approximately 11 percentage point headwind to our license revenue for the quarter.
The remainder of the decline in license revenue reflects the combination of the impact of the cyber incident and the continuing impact of the COVID-19 pandemic.
That said, our new license sales performance with commercial customers has improved sequentially each quarter during the year.
And while we have continued to sell to customers in the federal government and I've had some very bad and it had some key wins post december's new sales to customers in the federal space overall, it's been a challenge this year.
We have an incredibly committed federal team, whose primary focus has been on working with customers and maintaining the security and stability of their environments.
Moving to our subscription revenue third quarter subscription revenue was $32 3 million up 20.
<unk> year over year.
This increase is due to the additional subscription revenues from century, one product as well as increased sales of our on premises subscriptions as part of our early efforts to shift more of our business to subscription.
Total <unk> reached approximately $624 million as of September 32021.
Reflecting year over year growth of 9% and is up slightly from our ending Q2 2021, a balance of $621 million, which is the correct amounts included in our 8-K filing from earlier this month.
The growth in <unk> is primarily due to the incremental revenue from century, one, which we acquired late last year and our efforts on sales of our products and on premise subscription.
Subscription <unk> of $130 2 million increased 23% year over year, and 9% sequentially from the second quarter.
We finished the third quarter of 2021 was 786 customers that is.
More than $100000 with us in the last 12 months, which is a 4% improvement over the previous year.
We are continuing our efforts to build larger relationships with our enterprise customers, which we will talk more about at our upcoming analyst day next month.
We delivered a solid quarter of non-GAAP profitability third quarter, adjusted EBITDA was $75 3 million, representing an adjusted EBITDA margin of 42% exceeding the high end of the outlook for the third quarter, despite continuing to invest in our business.
Excluded from adjusted EBITDA for one time cost of approximately $2 $9 million of cyber related remediation containment investigation and professional fees net of insurance proceeds.
I do want to clarify that these cyber related costs not included in adjusted EBITDA of one time nonrecurring.
They are separate and distinct from our secured by design initiatives, which are aimed at enhancing our it security and supply chain process.
Cost related to our secured by design initiatives are and will remain part of our recurring cost structure as we go forward.
We expect onetime cyber related cost to fluctuate in future quarters, but to be less in future periods. These onetime cyber costs are however are difficult to predict they not only include the significant cost of the forensic investigation efforts, we substantially completed in may but also costs associated with our ongoing litigation government.
<unk> and any potential judgments refines related and as well as related professional fees.
We expect our insurance coverage to offset a portion of these expenses and will be and will be presented net of insurance proceeds.
Net leverage at September 30 was approximately three eight times, our pro forma trailing 12 months adjusted EBITDA.
We retained the full amount of the $1 9 billion in term debt.
The company has <unk>.
During the third quarter, we completed a two for one reverse stock split and declared a dividend of $1 50 per share on a post split basis, which was paid in August and.
In addition, enable repaid $325 million of intercompany debt.
As a result of this repayment our cash balance is $709 million at the end of the third quarter, bringing our net debt to approximately $1 2 billion.
And as to keep that cash on our balance sheet for the foreseeable future we.
We believe we had favorable trends on our debt. So we intend to maintain flexibility as it relates to our cash on balance sheet.
Our debt matures in February of 2024, and we expect to revisit our level of gross debt as we get closer to that date.
I will now walk you through our outlook before turning it back over to Sudhakar for some final thoughts.
We are providing guidance for the fourth quarter of 2021 for total revenue adjusted EBITDA and earnings per share and we will tell you what that means for the full year.
For the fourth quarter of 2021, we expect total revenue to be in the range of $180 million to $184 million, representing a year over year decline of negative three to negative 1%.
Adjusted EBITDA for the fourth quarter is expected to be approximately $72 million to $74 million, which implies an approximately 40% adjusted EBITDA margin.
Non-GAAP fully diluted earnings per share is projected to be 25 to 26 cents per share assuming an estimated $160 7 million fully diluted shares outstanding which reflects the reverse stock split completed on July 30.
And finally, our outlook for the fourth quarter assumes a non-GAAP tax rate of 22% and we expect to pay approximately $8 million in cash taxes during the fourth quarter of 2021.
For the full year, we expect total revenue to be in the range of 712 or $716 million.
Representing a year over year decline of negative one to flat with prior year adjusted EBITDA for the full year is expected to be approximately $297 million to $299 million, which implies an approximately 42% adjusted EBITDA margin for the year.
Non-GAAP fully diluted earnings per share is projected to be one point or $1 14 to $1 15 per share assuming an estimated 165 million fully diluted shares outstanding.
As you think about the components of revenue in the fourth quarter. It is important to remember that we acquired century, one last year in late October we.
We expect our subscription revenue growth in the fourth quarter to be in the high single digits.
However, looking ahead to 2022 and beyond we continue we intend to continue to expand our subscription offerings.
Making new subscription sales a much higher priority with ourselves.
Based on what we've seen year to date, we expect that maintenance renewal rates will be in the high <unk> for the fourth quarter and anticipate continued progress throughout 2022.
In the near term, we expect that maintenance revenue will continue to be relatively flat to slightly down compared to prior year periods.
And as we think about EBITDA margins for the rest of the year and into 2022 the costs associated with our secure about its on initiatives investments in transitioning our product portfolio to a greater subscription mix and our continued investments in our sales and marketing initiatives are factored into the margins in the short term.
We anticipate accelerating margins again in the future, but believe that these investments are now necessary we.
We will talk more about these initiatives at our analyst day on November 10, with that I will turn the call back over to Sudhakar for his closing remarks.
Thank you bought our team's confidence commitment and attitude continues to be on display as we delivered a strong Q3 performance exceeding our popular in both total revenue and adjusted EBITDA.
We are executing on our mission to help customers accelerate their business transformation by a simple fast and secure solutions for multi cloud environments. In Q3, we introduced an early adopter program of Sullivan's observer ability to select customers these customers cutting.
E under maintenance had the opportunity to make an early move to subscribe to our offerings and begin that journey to multi cloud with Sullivan as a strategic partner.
By eliminating customer complexity and meeting them mandate currently far we believe we are uniquely positioned to protect their investments, while increasing our relevance to them over time.
We expect this motion to become a mainstream activity in our upcoming quarters and a significant contributor to our subscription and era.
In Q4, we continued to execute on the initiatives that I outlined during our Q4, 'twenty 'twenty earnings call focusing on customer retention and demonstrating ongoing progress in subscription license and maintenance growth across all geographies and sectors.
Consumers by again thanking our employees partners and customers for their commitment to <unk>, we hope to see you all on November 10th.
Bob and I will not be happy to address your question.
Thank you as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Matt Hedberg with RBC capital markets. Your line is open.
Hi. This is the next step of Matt Hedberg. Thanks for taking my question, maybe just start with could you talk about how to sort of looking from a new bookings perspective, given to your point, you'll be getting bookings quarter.
Okay.
So yes, obviously, the new bookings for the fourth quarter is factored into the range that I provided from for it from a total revenue perspective.
It also as you said you know is our biggest quarter.
Talked about commercial bookings trending positively through the year and.
And we expect that to be the case as well in the fourth quarter.
Yes.
But yeah. My second question given it has been over 10 months since the beach.
If you could provide us an update on how the conversations with customers have evolved.
Keith can you.
Maybe give us an update on that and the one time, you'll have noted an uptick into an annuity that 88% which is great.
Oh I know on the last call you'd noted in the past that our customers have been taking some often with a chicken.
I'm going to buy have you seen that even Q T.
So let me address that but first of all on the renewal rate as you highlighted be exceeded the range that we previously provided of low to mid <unk> by delivering at 88% of annual rate in Q3, Richard as you have observed has been trending higher throughout.
The year of.
What we anticipate is that that trend will continue as we go into Q4 and into 2022.
T O P. J S question as to how our customer conversation going.
Classified ads in Q1 and Q2 most of the customer conversations were related to the incident itself in terms of what's happened how did this happen and so on and these days the conversations are more about our learnings from the incident the improvements that we have made in <unk>.
I kept by design and how we can apply those improvements to customer environments, because many of our customers. It also produces a software and they obviously want to deliver secure software as well so in that regard, but becoming more strategic to our customers rather than simply be a technology supplier.
Thank you.
Okay.
The next question is from Sterling Auty with Jpmorgan. Your line is open.
Yeah. Thanks, Hi, guys. So maybe just following on that a little bit I'm, just curious in terms of new logo.
Traction in the quarter and the enterprise you mentioned what was happening in government, but what specifically did you see in terms of new logos on the enterprise side and is there any particular product area that particularly is resonating.
Okay.
So Bob I'll take a crack at the selling and if you have a follow on question, please see that because well.
We are seeing traction all across the.
Their portfolio, so stocking without Orion platform, including through some of our partners.
The GSI that I mentioned in my prepared remarks Sterling.
Additionally.
Database monitoring has been.
Farquhar, putting announced for Automotives.
The same thing about I should say almost for a year with additional components in our database monitoring which is also.
Seeing very good traction both with call.
Call it our velocity motion as the best Enterprise motion.
And then more recently, we have started packaging and integrating these solutions.
Our better together fashion.
And what I noticed is that some of the enterprise customer about factoring that entire portfolio approach because it gives them optionality to leverage the technology must be me.
So broadly speaking at a crop cycle one.
One concentrated.
Part of the portfolio.
Yeah, and it certainly got it okay.
Certainly from a customer count standpoint, the trend in the third quarter and is being is consistent with what we've seen in every other quarter and as it's trended over the last couple of years and we even had our typical spike in the third quarter.
And we hope that that will happen again in the fourth quarter.
Yes.
Alright that makes sense and then one follow up.
Go ahead Barry.
I hope you'll stay birthday.
The number in the script that 786 customers.
That's the number that we've focused on in the past and that turned it up as well this quarter.
Okay.
Makes sense that makes sense, what one other areas you mentioned observe ability.
A couple of times is he absorbability kind of suite of package or bundle really going to be focused or.
And let's see.
Sounds good thank you.
The next question is from San Jeep Sing with Morgan Stanley. Your line is open.
Thank you for taking the question.
Oh of course.
More on kind of the shape of the revenue curve, what some of the factors have influenced that growth in house with each about that cold Ford and that's specifically related to a couple of factors, but I was hoping you could comment on one what.
What has been the impact on revenue growth from the shift to subscription if you could just walk through the unit economics and the breakeven timelines for a deal that's driven by subscription versus a deal that's coming into licensing maintenance. That's number one to the impact of Covid and three the impact of the breach.
How are those how are those 10 months shaping across those three metrics to inform our our view growth going forward.
Yeah.
Answered the first question you know.
We.
For us with an 11% headwind.
Your total revenue for the quarter.
And then your question about how much of it is related.
19 versus the cyber incident, that's a little harder to quantify what I would tell you know I think we're getting the pandemic kind of behind this at this point and most of the impact from a license or from a growth perspective, right now is due to.
The number of incidents, where obviously seeing less and less as we get further away from last December.
But instead of the trend has been.
It has been has been improving.
[noise] understood.
Last question and it goes from his pocket growth, but this time just.
I'm sorry, Dr.
Yeah.
Yeah.
An appointment.
And your last week is refunding.
Anybody that talking to call it.
All the way through to end of Q1.
Most of five.
Activities.
For going cause that'd be vertically customers to bring them back on track and mainly focused on the fifth.
And so we had to kick it back.
Into Gary let's call it in queue to enter that yet seeing some of the positive effects of that as well and you should continue to see that going forward.
Yeah.
Understood and very well noted and then the next question I have is around subscription growth and.
So ER a growth has been hovering in the 20% range for subscription and then for four accused sort of pointing us to 9% growth I know, there's some inorganic contribution but I was wondering if you could.
Sort of draw that or provide that bridge for us otherwise subscription I forget the decelerate to the extent that it has given the 20% subscription a year of growth that we've seen over the last couple of quarters.
The subscription is obviously takes the takes what are ending run rate is in annualize that numbers change it and so and so obviously.
Subscription revenue that we picked up from century one.
We get a bigger impact of that when you when you annualize.
That number.
You'll see that's why I got it for the fourth quarter of that you'll see more of what our organic growth is in the fourth quarter, because we're coming up on the anniversary of the century, one deal. So subscription revenue will growth in the fourth quarter will be in the high single digits.
Understood I appreciate it thank you for it.
Our next question is from Rob Oliver was bird your line is open.
Great My guys. Good morning. Thank you for taking my questions. Bart in your comments you talk about some of the challenges in new sales to fed and I think that that makes absolute sense [noise], but just curious on [noise].
[noise] said retention and how you guys.
You'll felt in the quarter relative to some of those those fed renewals into fiscal year and I know Sadaka. You had mentioned coach customer retention was really number one focus for you guys through this period and.
You've done a really nice job I think kinda managing Ah Ah really unprecedented atmosphere, but just curious relative to a U S felt in particular did you see the.
Sure not a U S bad where there where there agencies that then walked away just how do you characterize that opportunity.
Bypass I'll take a crack at and.
At.
First of all.
As you can imagine.
At a customer co on casting customers.
And and and take care of the.
Perfect customers.
They live longer than the commercials.
And then you might be right that.
That being said I'd have overall blended rate of 88 et cetera, and you're right. If I were to break down simply Ed.
This turned out to be over 80% target pregnant that'd be nagi breakout, but if you put that in context that is a very good results even.
That had a long arc of recovery, so I'm I'm encouraged by that and as I mentioned, we have a super dedicated team and our customers.
Have also been.
Very supportive of us including in the ethic.
[noise] got it okay. That's that's very helpful. And then just just one.
General question I know, we're gonna get a lot of detail what the analysts event, but you know there's been talk about a durability and devops and historically you guys had a really good reputation with with with those I T professionals and is there any thought about you know revamping the developer and Ikea Pro focus in particular I'm thinking of.
About the community that you guys historically, Heather was pretty strong and it seemed to deal with whack. It just seems activity levels there.
I'm Slacking debate just curious if that's if that's a part of the strategy going forward.
Most definitely some of the community has always been.
Credibly part of our strategy.
It could have been the foundation of that I would say that.
And you communicate and failed on it but when I mention that off and set costs.
Ignition that the lines of sometime.
Those and Danny.
And we need to listen to every one of those communities until you will notice that.
Community will also start reflecting that strategy as we move forward into 2022 MPR.
[noise] great. Thanks again guys.
The next question is from Eric Suffolk, or with JMP Securities. Your line is open.
Yeah. Thanks for taking the question I, just want to make sure I heard correctly.
The renewal rate in the in the third sector still north of of 80% does that is that correct.
Yeah.
Okay, and then and then.
The the license revenue declined about 26% do you think that's going to remain in that kind of.
Decline range of maybe the 20% to 30% range as you continue to shift towards towards subscription is that is that what we can expect going forward.
[noise] no I mean.
Eric as you start to feel that your models obviously.
We expect 2021 to be the year that most impacted by members.
You'll start to see improvement in our license revenue and you won't see the same kind of year over year decline at least our anniversary date December.
So so you should start to see some improvement there as it relates to our license sales and the impact on subscription at this point like I said, it's an <unk>.
7% headwind.
On our total license revenue.
That will become a bigger number as we move into 2022 really more bill in the second half when the Observability products.
Or.
Oh.
Okay very good thank you.
The next question is from current maturing with Evercore ISI. Your line is open.
Yeah.
Yeah. Thanks, very much for taking the question I guess as far as the Doctor and you you'll probably talk about this all about the analyst day, but does the ship to selling more subscription change to go to market model for you all in a material way is it is it just more of the incentives have to be shipped around I'm, just curious if sort.
The structure of the sales model has had to be tweak to sort of sell something that some more.
Okay ongoing subscription versus more of a traditional perpetual license.
I classify it more as fast compensation.
Models and sales enablement practices.
Evolving changed nothing save a structure.
The one.
Maybe look at it from a programmatic standpoint is how we engage with partners in the pop named Ted is in the pocket of motivation to do that.
[noise] that's helpful and then embarked on on the maintenance renewal side.
When you lose a customer. These days are they are they moving off the technology have they just suspended maintenance I was just kind of curious if there's any opportunity to sort of have some of the maintenance that you've lost reattached over a period of time. If they are just sort of running solar winds without maintenance. So the asteroid or is it more of a decision on that they're parked it moved.
Technically to another vendor potential.
So go.
So there have been cases of let a customers.
Who may have responded let hatred.
The fact that we had that incident by trying to go into production and some of them have actually come back to us even ask the.
To maintain.
On a programmatic basis, our customer retention in going back to that being a number one priority in queue for is exactly going back to some of those customers and figuring out ways to bring them back online.
To.
Pilot reestablishment of maintenance or two.
Three obtain day.
The entire portfolio, so that as a motion that they started and I believe that we would have some traction.
Be having pretty categorize it.
Okay and then just last one for me is there any real change in.
Say, the sales trajectory or maintenance renewal rates. If you look at it on a geographic basis, meaning was it was the U S kind of hit harder than maybe EMEA in Asia pack or is it pretty similar across the board. When you think about sort of just yeah bookings momentum renewal rates et cetera.
Yeah.
Obviously, North America, just like on a license side with them with a little lower.
Not meaningful to be honest with you Kirk.
We were very encouraged by the fact that we managed to get rid of all right up to 88% for the year, obviously, well above what we what we projected at the start of the year.
And obviously very pleased with the performance of the third team as well to get the renal right.
Our federal customers of 80% as well.
Sounds good thanks for taking my questions.
Thank you Sir.
Our next question is from Eric suffer good with JMP Securities. Your line is open.
Yeah. Thanks, I'm just curious.
Has the have.
Have the supply chain.
Issues than any factor for either you or for any of your customers uhm either in the in the build out of your capabilities or in terms of the customer is getting projects underway.
[noise] [noise] [noise] [noise] [noise], Please ask me upfront.
Hence the quest to find that you are creating time trying to make sure that I address thing Tech of what you said.
If your quest Oh.
Yeah.
July chain challenges are lacking issues that we had.
No that's not the issue if your quest.
About the product and that piece of fighting issue I would say no.
At any act on it.
Okay. That's that's what I was asking is the broader supply chain. If that's made a difference to you, but it has got it okay.
We are almost entirely.
Selling software and many of our customers either disliked in cloud infrastructure western infrastructure, so they're not gonna depend on physically perhaps for the most part.
Very good thank you.
We have no further questions at this time will turn the call back to the presenters.
Great. Thanks, Chris and thanks, everybody tuned in today that concludes our third quarter recall have a good day.
[noise], ladies and gentlemen, this concludes news conference call. Thank you for participating and you may now disconnect.
[music].