Q1 2022 SolarWinds Corp Earnings Call
Ladies and gentlemen, good morning, My name is Abby and I will be your conference operator today.
At this time I would like to welcome everyone to the solar wins first quarter 2022 earnings call.
Today's conference is being recorded and all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply prestige Starkey followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one once again.
Thank you and I would now like to turn the conference over to Mr. Bert calcium Chief Financial Officer. Mr. Calcium you may begin your conference.
Yeah.
Thank you Abby good morning, everyone and welcome to solo as first quarter 2022 earnings call.
With me today is Sudhakar Ramakrishna, our president and CEO . Following prepared remarks, we'll have a question and answer session. This call is being simultaneously webcast on our Investor relations website at investors silver wins Dot com.
Our Investor Relations website, you can also find on our Investor Relations website. You can also find our earnings press release, and a summary, slide deck, which is intended to supplement our prepared remarks during today's call.
Please remember that certain statements made during this call are forward looking statements, including those concerning our financial outlook the impact of the cyber incident on our business our market opportunities our expectations regarding customer retention and our evolution to the subscription first mentality the impact of the global economic and geopolitical environment on our.
And the impact of the spin off of the enable business.
These statements are based on currently available information and assumptions and we undertake no duty to update this information except as required by law. These statements are also subject to a number of risks and uncertainties, including the numerous risks related to cyber incidents there.
The current global economic and geopolitical environment and the completed spin off of the enabled business.
Additional information concerning these statements and the risks and uncertainties associated with them is highlighted in today's earnings release and in our filings with the SEC copies.
Copies are available from the SEC or on our Investor Relations website.
We completed the spinoff of the enable business on July 19, 2021, and accordingly have included the results of the enable business as discontinued operations for historical periods.
Therefore, the financial results presented on this call reflect solar wind as a standalone business and do not include any contribution from the enable business.
Furthermore, we will discuss various non-GAAP financial measures on today's call.
Unless otherwise specified and when we refer to financial measures, we will be referring to the non-GAAP financial measures a reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call are available in our earnings press release and summary, slide deck on the Investor Relations page of our website.
We note also that beginning this quarter, we no longer adjust our revenues for the impact of purchase accounting. So our non-GAAP total revenue would have been equivalent to our GAAP total revenue for the first quarter of 2022.
With that I'll now turn the call over to Sudhakar.
Thank you Bob Good morning, everyone and thank you for joining us today.
I hope Youre doing Nevada, and staying safe.
Once again I would like to start by thanking our employees customers.
<unk> and our shareholders for their <unk>.
Ongoing commitment to Sullivan's.
In Q1, we made significant progress related to our key priority of customer retention increased focus on subscription revenue growth and evolution to platform based solution with the launch of our hybrid availability solution in April .
Our team achieved impressive results, despite a challenging macro environment due to the relevance of SaaS solution. The trust that our customers, placing us in the intense customer success mindset.
<unk>.
We continue to make solid progress towards the goals, we outlined during our analyst day on November 10 2021.
Our expanded offerings portfolio and expanding market opportunity, which we believe will amount to approximately $60 billion by 2025.
Further reinforce our goal of achieving at least $1 billion in <unk> by 2025 with a compounded annual subscription <unk> growth north of 30% over that time period.
And while building EBITDA margin in the mid <unk>.
We had several highlights in the first quarter of 2022, I will touch on some of the highlights before turning it back over to Bob for more color on the quarter as well as our financial outlook for the second quarter of 2022.
First I am very pleased to report that we timely achieved an important step in our transformation efforts that we outlined during our analyst day to help customers automate observe visualize and remediate the environment leveraging the Sullivan platform as we.
Help accelerate their business transformation in multi cloud world.
Sullivan hybrid cloud availability is generally available as of April 19. After a successful early access preview with great.
And feedback from customers.
Leveraging our best in class monitoring solution, we had overlaid observed mobility benefits with tiered subscription licenses.
Customers. In addition to protecting the current investment enjoy the increased benefit of simplicity, including with node based licensing and greater productivity, while creating effective on ramp to cloud deployments.
For the first quarter, we delivered revenues of $177 million.
Above the high end of the range, we provided of 173 to $1 $76 million.
This represents 82% year over year growth.
Bob will outline the euro currency headwinds that we and others experience without which we would have delivered another.
1% of additional growth.
Adjusted EBITDA was $69 million, representing an adjusted EBITDA margin of 39% again exceeding our outlook for the first quarter.
Boston I previously indicated that we expect maintenance renewal rates to approach historical rates in the low to mid Ninety's in 2022.
Im excited to report that in Q1 2022.
In quarter renewal rates were 91%.
I attribute this directly to the commitment of our teams the relevancy of our solution and the craft.
<unk> placed in us.
We also believe that the return of our renewal rates to our historical levels creates an even more solid foundation for business growth in the future.
Subscription revenue year over year growth was 37% supported by our largest customer converting to term subscription.
We continue to drive a subscription first mindset and continue to believe that we can grow both top line and.
Subscription simultaneously.
We finished the first quarter of 2022 with 852 customers that have spent more than $100000 with us in the last 12 months.
This is 11% improvement over the previous year.
Increasingly we are helping customers to consolidate tools to enjoy comprehensive visibility and to integrate data environment, resulting in larger deal sizes.
Our service desk also known as <unk> in broad brush terms and database portfolios continued to demonstrate strong net retention and expansion growth and increasingly help us create a broader business foundation not only in revenue terms, but also in ways. We can serve.
The evolving business transformation needs of our customers.
Sullivan service desk solution now.
Dynamic funds.
The use of dynamic farm is one of the most powerful changes made to the Sullivan service desk portfolio.
This was consistently amongst the most requested features by customers for the past few quarters.
Dynamic com rules allow agents to collect vital information relevant to customer issues quickly and efficiently accelerating problem resolution.
<unk> of innovation and customer adoption of our service desk solution has increased and Dave will form the basis for the automation and remediation pillows of the Sullivan platforms.
We expanded our Sullivan's database performance analyzer DPA to now support all global cloud sequel offerings, including Mysql Postgresql SQL and sequel server. This is in addition to the support of Azure and AWS hyper scalar platform.
The 2022, Giga AUM radar for cloud availability solution rated Solomon hybrid cloud availability as the leader in fast millwork due to our strength across all key criteria of evaluation, including reporting and dashboards user interaction.
Performance multi cloud resource views predictive analysis and licensing flexibility.
Sullivan hosted <unk> 2022 on March 2nd and third.
This virtual event was attended by over 2200 members.
Attending 14 sessions across eight hours and marking our 10th anniversary of the successful event.
Our vibrant track user community of more than 180000 registered members continues to grow with them.
Deb <unk> and cloud ops profession, and remains a key source of primary research and customer preferences for us.
Engaging with our customers and community enables us to ensure our solutions are relevant to our customers and we believe further increases the rate of success of our investments.
With that I'll turn it over to Bob to provide more details on our financial performance and outlook.
Thanks Sudhakar.
In 2021, we were focused on retaining customers in 2022, we are turning our attention to reaccelerate growth with a subscription first mentality.
The first quarter was the first full quarter in our journey and shifting to a subscription first mentality and repositioning the company in the Absorbability market.
While our journey is only beginning our first quarter results are indicative of that transition and reflect a solid quarter of execution.
That execution led to another quarter of better than expected financial results with total revenue ending at $177 million above the high end of our total revenue outlook of $173 million to $176 million.
We no longer adjust our revenue for the impact of purchase accounting. So our GAAP total revenue is equivalent to the non-GAAP total revenue measure we have historically reported.
I will start with subscription revenue to go along with our subscription first mentality.
First quarter subscription revenue was $38 7 million up 37% year over year.
Aided by the conversion of our largest maintenance customer to a subscription arrangements.
This conversion contributed approximately 9% of the 37% year over year growth.
Notwithstanding this conversion our subscription revenues still grew beyond our expectations, reflecting albeit early in our journey.
The success of our subscription first efforts.
Similar to our license and maintenance arrangements as we convert maintenance customers to the hybrid absorbability subscriptions, we recognize a majority of the revenue upfront and the rest ratably over the subscription period.
Our subscription IRR as of March 31, 2022 was $142 million, which is an increase of 30% year over year.
Total license and maintenance revenue was $138 million in the first quarter, which is a decrease of 5% from the prior year period.
Maintenance revenue was $115 $5 million in the first quarter, which is a decrease of 4% from the prior year as.
As we talked about in February our maintenance revenue has been impacted by a combination of prior year year over year declines in license sales and a reduction in our renewal rates in 2021.
The trend toward lower license sales was further impacted by the introduction of our of subscriptions of our licensed products in the second quarter of 2020.
The cyber incident in December 2020, and as we focused more of our efforts on longer term customer success and retention.
This trend continued in the first quarter as we shifted more of our focus to sales of our subscription solutions as well as conversions of our maintenance customers to term subscriptions.
In 2021, we were encouraged by the fact that our maintenance renewal rates, we're at 88% and they continue to be at that level on a trailing 12 month basis at the end of Q1.
However, our in quarter renewal rate for the first quarter of 2022 is currently at 91%, which is more consistent with our historical norms of the low to mid nineties.
This is a testament to the loyalty of our customer base and our efforts for the past 12 months as we convert maintenance customers to subscription arrangements, we exclude those customers from this calculation as you would expect.
For the first quarter license revenue was $22 6 million, which represents a decline of approximately 9% as compared to the first quarter of 2021.
Keep in mind, our new perpetual license sales performance will continue to be impacted by our focus on sales of <unk> subscription offerings.
As noted previously our increased sales of subscriptions offset the decline in license revenue.
Importantly, our overall, new subscription sales, including conversions of maintenance customers to subscription arrangements were better than anticipated, which resulted in total revenue exceeding our outlook.
Looking ahead, we continue to believe that our new sales mix will deliver overall revenue growth, even as we accelerate customer transitions to subscription arrangements.
As Sudhakar mentioned earlier, we finished the first quarter of 2022 with 852 customers that have spent more than $100000 with us in the last 12 months, which is an 11% improvement over the previous year.
We continue to supplement our traditional high velocity low touch sales approach with targeted efforts to build larger relationships with our enterprise customers, which we detailed at our analyst day in November .
We also delivered a solid first quarter of non-GAAP profitability.
First quarter, adjusted EBITDA was $68 $8 million.
Representing a net and adjusted EBITDA margin of 39%.
Exceeding our outlook for the quarter, even as we continue to invest in our business.
Excluded from adjusted EBITDA in the first quarter are one time costs of approximately $5 $7 million.
The cyber incident related investigation and professional fees net of insurance proceeds.
These cyber incident related costs that are not included in adjusted EBITDA are onetime and nonrecurring.
We expect onetime cyber incident related cost to fluctuate in future quarters, but to overall be lower as we get further away from the incident.
Onetime cyber costs are however, very difficult to predict.
Net leverage at March 31, 2022 was approximately three nine times, our trailing 12 month adjusted EBITDA.
As a reminder, we retain the full amount of the $1 9 billion in term debt that we had prior to the spinoff of enable our.
Our cash balance was $751 million at the end of the first quarter, bringing our net debt to approximately $1 2 billion.
We believe we have favorable terms on our debt. So we intend to maintain that flexibility as it relates to the cash on our 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.
As I turn to Q2 guidance I want to remind everyone that we transact a significant portion of our business in euros and as you all know the euro to U S. Dollar FX environment has weakened significantly from the beginning of the year.
The Euro is currently 9% lower than when we provided our initial analysts got annual guidance in November in November at our analyst day.
For the second quarter, we expect total revenue to be in the range of $174 million to $177 million.
Representing a year over year decline of 2% to flat.
Revenue for the second quarter would be approximately $4 million higher assuming the same FX rates as the second quarter of 2021.
Adjusted EBITDA margin for the second quarter is expected to be approximately 37% 38%.
non-GAAP fully diluted earnings per share is projected to be <unk> 20 per share assuming an estimated $161 6 million fully diluted shares outstanding.
And finally, our outlook for the second quarter assumes a non-GAAP tax rate of 24% as we expect to pay approximately $13 1 million in cash tax taxes during the second quarter of 2022.
We are reaffirming our prior year full full year guidance for total revenue and adjusted EBITDA margins. Despite the lower the lower euro to U S dollar FX rates and we previously used.
We expect total revenue to be in the range of $730 to $750 million representing year over year growth of 2% to 4%.
We expect our total revenue to be positively impacted by increases in new sales of our license and subscription products in 2022 as compared to 2021.
We will lead with a subscription first focus as it relates to new sales and we will also focus on migrating our maintenance customers to our hybrid absorbability products, which are sold as subscriptions.
We expect an acceleration in new sales and migrations to our hybrid absorbability products in the second half of the year when more of the functionality of the platform is available in our go to market initiatives will be more mature.
We expect that our total revenue growth will be partially offset by a decline in maintenance revenue due to lower license sales over the past two years as well as continued conversions of our maintenance customers to subscription offerings.
Adjusted EBITDA margin for the year is expected to be approximately 41%.
non-GAAP fully diluted earnings per share is projected to be 88 to 95 per share assuming an estimated $162 6 million fully diluted shares outstanding.
Note that EPS for the full year is lower than what we guided to on our prior earnings call, reflecting an increase in our non-GAAP tax rate to 24% as well as an increase to our interest expense forecast in line with the current interest rate environment.
Although our full year and second year.
Although our full year and second quarter guidance assumes a euro to dollar exchange rate.
That is lower than is lower than the 13113, we assumed for 2022, when we provided our initial 2022 outlook in February .
We are reaffirming the full year guidance for total revenue and adjusted EBITDA margins based on our performance to date and our current expectations.
With that I will now turn the call back over to Sudhakar for his closing remarks.
Thank you, but I am pleased with our strong Q1 performance exceeding our outlook in both total revenue and adjusted EBITDA margins.
We are executing on our mission to help customers accelerate their business transformation by a simple powerful and secure solutions for multi cloud environments.
Disciplined approach to portfolio and go to market expansion combined with intense customer centricity enabled us to return to our historical in quarter renewal rates in Q1 earlier than we had previously suggested.
This we believe provides a strong foundation for continued growth.
In Q2, we will continue our journey of subscription growth with our Sullivan hybrid availability application monitoring service desk and database solutions.
Orion platform tools portfolio and cloud solutions continue to enjoy significant customer trust.
Strategy to a unified platform delivers simpler and superior customer experiences expanded go to market motion and a focus on customer success are being well received by our partners and customers.
We will continue to exercise discipline in how we invest in our business in order to deliver a unique combination of growth and profitability.
This we believe increasingly represents a compelling investment opportunity.
Conclude by again thanking our employees partners customers and shareholders for their commitment to Sullivan.
Bob and I will now be happy to address your questions.
Okay.
And at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and we'll pause for just a moment to compile the Q&A roster.
We will take our first question from Rob Oliver with Baird. Your line is open great.
Great. Thank you. Good morning can you guys hear me okay.
Yes.
Okay, great. Thank you.
Sudhakar I wanted to start with you and ask about the large conversion in the quarter, obviously pretty exciting to see.
Customer convert like that and just wanted to understand whether any particular pivot points that could cause the customer to stand up and convert to subscription can you talk about any changes in.
Product usage or platform usage that came with the conversion of <unk> can you talk about the pipeline of conversions that are out there.
And then I had a quick follow up as well.
Definitely Rob Thanks for the thanks for the question and good to reconnect.
As it relates to the subscription offerings like we discussed even last year. Our focus is not simply a business model change as much as a value proposition extension.
So as we look at customers talk to them about converting to subscription it is.
Is heavily based on how we are evolving to the hybrid availability.
As an on ramp to the cloud so typically when customers.
<unk> evolved to a subscription model they will be using more than one product of ours.
And look at the proposition as helping them consolidate let's say more vendor products reduce the tool sprawl.
And so those become the conversation.
Another reason why you saw it.
Expansion of the number of customers, who are more than 100, K with us as well in terms of the pipeline drop the way I would describe it as last year, we moved away or evolved I should say from a <unk> revenue model to a continuous touch model with the inclusion of our customer success.
<unk> organization. So what we are in the process of doing is looking ahead 90 days or 180 days from when customers are coming up for their maintenance renewals and actively discussing with them the opportunity to evolve to subscription. So thats one source of pipeline the second dose of <unk>.
Pipeline is our new sales teams themselves proposing these solutions do customers for.
Along a number of sales please.
Tools product consolidation being one.
Integrated visibility being another and so on so those are the two sources of the pipe and I can say that the pipe is actually growing.
Great. That's really helpful color. Thanks, and then I just had one follow ups and <unk> you made the.
The comment in your prepared remarks about the challenging macro.
It did seem that for you guys that at least in terms of direct impact right now that is limited to currency.
But and I think inter quarter, you've made some public comments about <unk>.
Exposure to Russia, and Ukraine, which was somewhat limited, but just would love to hear a little bit more of what you mean, when you say challenging macro what what you see out there.
And any other color there would be helpful in terms of potential impacts to the business. Thank you.
Definitely.
FX is the majority concern and contribute to a given how much we.
Transact in euros, and how we model the year as Bob described in terms of the Euro assumption. So that is the largest impact.
In terms of actual business.
We did have a nominal impact I would say in Russia, but that team has been able to recover in other regions and I don't anticipate that to be the key issue, but when I say macro impact macro environment. It is not just the FX environment it could be interest rate.
Uncertainty is more the issue, but nothing specific to us.
That we know off other than the FX piece.
Great. Thank you guys again I appreciate it.
Thanks, Rob.
We will take our next question from Matthew Hedberg with RBC capital markets. Your line is open.
Hey, this is simmering with wall for Matt Hedberg, Thanks for taking our question.
I was hoping you could drill down a little bit on your overall view of the health of SME spending on a global level and expand on that thank you.
As you know our business is spaced cigna.
Significantly on.
The mid market SME SMB and so on we have our share of large customers as well and based on our conversations with our customers and our partners. We continue to believe that it will be similar if not more robust than call. It the larger enterprise.
Spend but across the board what we notice is that customers crave for solutions along the dimension that we have been delivering because we result in more efficiency for customers better productivity for customers and improve security for them. So those tend to be business critical.
And we expect that demand to continue although I'm sure you've seen all the reports around.
It spending.
Great across the world and we see consistency in our business as well around that.
Okay, great. Thank you.
And we will take our next question from Erik <unk> with JMP Securities. Your line is open.
Yes, good morning.
First off.
Barak can you comment if you can remind us.
How your your interest expense.
What exposure you have to variable interest rates as.
As they come up.
And then secondly, just talk a little bit about how you are expecting.
We observe ability platform two to ramp.
What metrics can we look to the specific too.
The success of customer adoption there.
Okay.
Thanks, Eric.
Full amount of our debt Eric is the $1 9 billion is subject to variable interest rates. So it's had a lot of its based off of currently off LIBOR, obviously that will change as we start to move away from the LIBOR as the basis, but.
But the full amount is subject to.
Variable interest rates.
So as interest rates creep up that will have an impact on our cash.
And then.
Winter when we're talking about the metrics to look at for the business Eric.
What we're focused on is a couple of things it's the combination of subscription.
Subscription revenue growth, but also what we talked about on the subscription side.
Why we need to look at both of those things kind of in combination.
As I described when we convert an existing license or an existing maintenance customer to a subscription arrangement currently that subscription arrangement is similar to a term license. It's a one year subscription so the subscription revenue isn't perfectly ratable over the subscription term there is at <unk>.
Ponant of upfront revenue with us with that subscription arrangement.
So that's why we look at subscription <unk>.
Because it tends to smooth out.
Some of the Lumpiness of the revenue associated with those subscription deals as we get into a full observed ability in 2023, and we have the full SaaS version of our durability products those arrangements will be fully ratable from a subscription revenue standpoint, but until we get there there will be some lumpiness.
In both our license revenue and our subscription revenue associated.
Associated with both new sales and.
Conversions of our maintenance base to subscription.
Okay.
I guess I was trying to get more of a sense for.
How quickly do you expect.
Customer adoption to take place.
Are you anticipating that there will be.
A rapid ramp in terms of customers adopting the platform.
Or is it something where the feature set.
It's going to be more of a 2023.
Timeframe before has broad.
Broad opportunity across your customer side.
Yes.
So it's going to be more like 2023 before you see you see broad adoption, Eric I mean still the vast majority of our new sales.
Our license and maintenance arrangements.
So right now we're rolling out the functionality of our Absorbability products in 2022, but like I said full functionality won't be available until 2023. So so we're not foreseeing.
Or or or even talking about having any kind of forcing function on our maintenance space.
Forced them over to our subscription offerings.
We are talking to our customers about it we are laying the groundwork to start to have those conversations, but that's not going to happen anytime in 2022.
Very good thank you.
We will take our next question from Kirk <unk> with Evercore ISI. Your line is open.
Hey, guys.
On behalf of Kirk.
The question I just wanted to ask you had mentioned a little bit about evolving to a per node pricing model instead of more on a per product basis.
And you mentioned that it would give customers more flexibility and more uplift.
What are you seeing that was like feedback from customers about this.
Are you kind of thinking about this model it going forward.
Basically yes.
So next quarter.
So Bob I'll address that.
The node based licensing or pricing model has already been implemented I mentioned in my remarks about the launch of our hybrid availability solutions that happened on April 19, So coincident with that we launched node based license pricing as well.
The way I would characterize this is simplicity is one of our solid brand promises and it's not just about the simplicity of the product, but also the simplicity as it relates to the licensing and consumption models.
So in that regard as we went through our early access preview that I mentioned, which started.
Late last year, all the way through April one of the consistent bids of positive.
Positive feedback I would say we received from partners and customers is the node based licensing flexibility that big yet so.
So that base self is not going to create uplift, but that buy that will definitely create a.
Easier conversations and higher sales velocity as we move forward with customers.
Gotcha. Thank you for the clarification and then just quickly on that.
The acquisition you guys did the quarter monolithic.
Just anything you can kind of play.
That's great.
Yes, as it relates to monolithic I'll remind everyone that we made the acquisition of analytic.
Largely because of the strength in the federal and broadly in the public sector space.
Also as Eva.
Demonstrating our total commitment to our federal government customers that team has.
Completely integrated with us our teams in the go to market motion.
And increasingly penetrating patriot customers.
<unk>.
What I can also say that.
More and more of our carrier customers are engaging with us and our federal team.
Is very valid coordinated as it executes not only the first half of this year, but as it prepares for Q3 and beyond which which as you know is the largest spending quarter.
So.
In terms of additional services, we are creating new service offerings as well, but I would not call them material to report at this point.
Thank you so much.
And your next question comes from Conor Pasteurella with <unk> Securities. Your line is open.
Hey, Good morning. This is connor on for Terry Tillman.
Work on the quarter just one question for me on the sales motion and hiring so I know there was an expansion of Midmarket and enterprise motions, just curious as to what Youre seeing in terms of yield from these teams on a global scale and then second part maybe werent you'd be focused on add head count came in a tougher macro environment. Thank you.
So couple of areas I'd highlight and if I don't fully answer your question. Please ask me on a call.
Because.
Your line was a bit choppy.
In terms of hiring Lee, let me start with our go to market and particularly the sales piece.
We remain today.
Largely and we will continue remaining.
The inside sales based.
Based company.
Ernie.
In our history, we drove what was known as the download trial could model going forward as we evolve to a platform. The Sullivan platform will have the ability to demonstrate or in other words try and buy so further reducing the sales friction. So a lot of our focus with regards to <unk>.
<unk> and enablement has been with our inside sales motion that being said in the spirit of what I described as retailing evolve grow there is an increasing outside motion and it is a selective outside motion which includes <unk>.
Hiring of partner managers, as well as enterprise sales reps and territory account managers.
We had I would say touch wood very good luck with regards to hiring incredibly talented people across our teams both on the go to market side as well as on the product side.
And our belief system is that nurturing and doing our very best to retain our employees is the best way to both manage our costs as well as improve our growth.
And.
While it's early in 2022, I will say that the conditions are much better in 'twenty two versus <unk> 21, with regards to both hiring and retaining.
Perfect. Thank you so much.
Thanks Connor.
As a reminder press star one if you would like to ask a question and our next question comes from <unk> Singh with Morgan Stanley . Your line is open.
Thank you for taking the question I was wondering if I could.
Get a little bit more clarity on the guidance along sort of two dimensions, the first election and sort of FX and if we sort of think about the guidance on a constant currency growth basis. If you can give us of what that growth rate was constant currency.
In the prior guidance versus what you are now I think that would be super helpful. And then the second element I wanted to dig.
<unk> was when you do get these migrations of the maintenance space and they convert to.
Some of the subscription offerings, whether it's.
Hydro separately package, where others, what does that do to rapidly in the sense that you have ahead.
Headed into the maintenance space, but what does that do to the subscription line are the deal sizes generally equivalent or does it take a.
A couple of years to get to sort of the equivalent.
Sure.
Okay.
Thanks, Andrew.
To answer your first question on the FX. So we had not previously provided any guidance as source as it specifically relates to Q2, but in my script I talked about the fact that.
If we used prior year.
Which I think the euro to U S. Dollar exchange rate in 2021 was was one two.
Then.
Our revenue would be $4 million higher.
So that would bring the bottom end up closer to flat and we would have closer to like 2% to 3% growth on a constant currency basis.
Assuming the same FX rates as the prior year.
And that's specifically as it relates to Q2.
For the full year.
The rate just recently dropped from about 109 down to 105.
We're waiting to see exactly how long term that drop is so when we get to the end of Q2, if we need to re forecast the full year at that at a lower rate than that then we may talk about what the full year, what that's going to have on the impact the full year, but for now we still think $7 30 to 750 is the number from.
Total revenue standpoint.
To answer your second question around the conversion of a subscription customer to maintenance.
So we talked about the fact that.
We got an extra nine percentage points of growth from the conversion of that the large customer in the first quarter.
Our conversion from maintenance to subscription like I said earlier on one of the other questions. It does have an upfront component to it as we convert that customer to subscription and it's like a term license. So.
Little more than 60% of that arrangement is recognized upfront with the remainder being recognized ratable over the subscription period. So there will be some choppiness to our subscription revenue just like there is in license revenue in the past so we will.
That's why we talked and I mentioned earlier that as we move through the year subscription IRR will be an important measure for us because it will smooth out some of the lumpiness in that subscription the way we recognize subscription revenue today in.
In 2023 and beyond.
More of our customers are buying the full SaaS version of our product that will be like your typical subscription arrangement with ratable Rev. Rec for the entire deal.
Understood. That's very helpful. Just one quick follow up on that point so totally.
Totally understood on the upfront.
Term license piece.
<unk>.
Using some sort of quarterly volatility on the revenues.
On a like for like basis on an <unk> deal. What are you guys sort of expecting if you have $100 maintenance customer when they convert to some of the subscription offerings, what does that do on an IRR basis.
Conversion.
Maybe I can provide color and happy to take up alone.
Later during our one on one as well two day, when we're converting maintenance customers to subscription.
We are converting at a much higher multiple than one to one.
So, let's say we convert.
<unk> hundred dollars maintenance customer that you said.
It is.
While it's early days, it's closer to 200 and the reason why it is that is less due to the business model alone more due to the value that the customers are getting with the observed relative solution the hybrid up the ability to use <unk>.
I do not expect that trend to continue for ever and it will it'll normalize, but it will still be meaningfully greater than the $100 of maintenance that we will trade off.
So to net it out will we see an expansion through that that is yes, and that's the metric that Bob was referring to with subscription <unk> being the metric that we should be looking at.
Yes.
Yes, it sounds very exciting in terms of that expansion opportunity and I'll leave it there. Thank you so much.
It is it is a large conversion opportunity, but we are in early days of that conversion and EBITDA journey.
And we will take our next question from John <unk> with our next credit your line is open.
Hey, Thanks for taking my question I appreciate it referencing slide seven in your in your deck.
They align with license and maintenance growth year over year down 6% down $3 five over the prior Q.
Through three quarters.
Is it possible to break down that decline rate and churn versus conversions to SaaS and subscription contracts.
So yes like I said previously the decline in maintenance revenue John It's a combination of things and I don't have the specific breakdown, but it is a combination of the fact that.
In 2000 2020 in 2021, we had year over year declines in our license revenue and whenever we have a new arrangement. We recognized typically recognize around 70% of that arrangement upfront and then defer 30% of that deal to maintenance revenue and then recognize that over the maintenance period.
And during periods of year over year declines in license revenue, we are adding less to that maintenance base as we move through the year that happened to us in 2020 because of Covid and then in 2021 because of the sunburst incident.
So that's what's causing some of the declines that you're seeing on the maintenance revenue over the last what I would say eight quarters.
From a churn perspective, we talked about what our renewal rates are historically, our renewal rates have been in the in the low to mid Ninety's in 2021.
That number dropped down to 88%.
Primarily because of the some burst incident, but we expect renewal rates as we move forward to get back to what our historical norms are and in fact, we saw that in the first quarter with our renewal rate and then at 91% for deals that were set to renew in the first quarter of 2022.
Got it real quick follow up on that term.
The recent conversions to SaaS you mentioned in 2020 for you to be more.
<unk> in line with.
Actual bookings et cetera.
Whats the term that you are using now are these contracts that are subscription based currently.
The vast majority of our subscription arrangements are 12 months deals.
So that's our IRR.
Matches, a lot its very matches, what our subscription deals are.
Got it last quick one from me. Thank you for let me sneak it in I guess on the on the right exposure are you guys are you hedged at all floating rate exposure rates going up partially or are you looking.
No. Thank you.
Yes, no we have not historically hedged our interest rate, we just we just paid us.
As interest rates have floated up and down.
We will highly likely renegotiate our debt sometime in the next nine months.
Our debt matures in February of 2024, so our goal is to try to get that debt renegotiated before it becomes current on our balance sheet.
Thanks again.
Thanks, John .
And there are no further questions at this time, ladies and gentlemen. This concludes today's conference call. We thank you for your participation and you may now disconnect.
Okay.
Yes.
Yes.
Yes.
Okay.
Okay.