Q2 2022 SolarWinds Corp Earnings Call
Good morning, My name is Chris and I'll be your conference operator today at this time I would like to welcome everyone to the solar winds Q2 2022 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If he would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
Thank you alright, calcium chief Financial Officer, you may begin.
Thank you Chris Good morning, everyone and welcome to <unk> second quarter 2022 earnings call with me today is Sudhakar Ramakrishna, our president and CEO .
Following prepared remarks, we will have a question and answer session. This call is being simultaneously webcast on our Investor Relations website at investors <unk> Dot com.
On our Investor Relations website, you can also find our earnings press release, and a summary, slide deck, which is intended to supplement our prepared remarks during today's call.
Please remember that certain statements made during this call are forward looking statements.
Including those concerning our financial outlook, our market opportunities, our expectations regarding customer retention and our.
To a subscription first mentality.
The impact of the global economic and geopolitical environment on our business the timing of the phases of our subscription evolution, our gross level of debt and the impact of the cyber incident in cyber security generally on our 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 subject to a number of risks and uncertainties, including the numerous risks and uncertainties highlighted in today's earnings release and in our filings with the SEC.
Copies are available from the SEC on our Investor Relations website.
We completed the spin off of enable on July 19th 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 wins as a standalone business.
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.
As a reminder, beginning with the first quarter of 2022, we no longer adjust our revenue for the impact of purchase accounting.
For the second quarter of 2022, non-GAAP total revenue is equivalent to our GAAP total revenue.
Finally, we note that the financial results discussed on today's call and in our earnings release, our preliminary and pending final review by Us and our external auditors and will not be final until we file our quarterly report on Form 10-Q.
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, you're all doing well and staying safe.
As always I'd like to start by thanking our employees customers partners and shareholders for their ongoing commitment to Sullivan.
I'm pleased to report the results our team achieved notwithstanding a tough macro and foreign exchange environment.
Low customer concentration compelling value proposition and high velocity transaction model enable us to operate successfully in any environment and particularly in constrained capex environments.
As you will notice in our results our teams made significant strides in improving customer retention to our historical levels continuing to focus on subscription revenue growth and evolving to platform based solutions that we believe offer the best time to value time to detect issue.
Hughes and time to resolve issues for our customers in their multi cloud environments.
We had several highlights in the second quarter of 2022.
I'll 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 third quarter and full year 2022.
We delivered revenues of 176 million near the high end of the range of guidance we provided.
On a constant currency basis, we would have delivered 2% year over year growth.
I'm excited to report that in Q2 2022, our in quarter renewal rates were 93% a sequential increase over last quarter and last 12 month renewal rates are now at 91%.
I attribute these results to the commitment of five teams the relevancy of our solutions and the trust our customers place in us.
We continue to drive a subscription first mindset and delivered subscription revenue growth of 25% year over year.
We've been able to achieve this trajectory in a short period of time without impacting total revenue notwithstanding the fact that transitions to subscription models often come at the expense of revenue growth in the short term.
We believe this has distinguished us from other transitions due to the mix of hybrid and SaaS offerings in our current portfolio.
We finished the second quarter of 2022 with 879 customers, who have spent more than 100000 with us in the last 12 months.
An increase of 13% over the previous year.
Increasingly we are helping customers reduce tool sprawl create comprehensive visibility across multi cloud environments.
Eliminate alert fatigue and accelerate their digital transformations, leading to larger deal sizes.
Adjusted EBITDA was $67 million, representing an adjusted EBITDA margin of 38% again in line with the outlook we provided.
We continue to expand our partnerships with traditional resellers global system integrators, and Hyperscale has been increasingly engaged in co sell and sell through activities and are winning large deals across our geographies with and through our partners.
Our partner ecosystem is a critical part of our go to market strategy.
We announced the general availability of our hybrid cloud mobility solutions. We also released the early access version of our integrated SaaS observer ability offerings based on the solar Vince platform to customers initially focused on the Dev ops and database <unk>.
Entities.
We'll extend the Sullivan's platform in the coming quarters into other areas, including service management.
By integrating observer ability and service management onto a single platform, we intend to deliver a very unique value proposition to address the automation observation visualization and remediation needs of our customers across I T Dev and setups communities.
A simple powerful and secure solutions built on strong technology and go to market foundations are being designed to be easy to try and buy and to give customers best time to value time to detect issues in their multi cloud environments and best time to remediate the issues.
Thereby saving significant cost and increasing productivity.
In Q2 Observer ability database and service management solutions, all received multiple industry accolades I'll mention a few.
Giga on cloud Absorbability radar report rated us a fast moving leader. This is an early recognition of emerging observer ability offerings three.
Three Stevie awards recognized innovations in database monitoring and for advancements in the secure by design initiatives.
<unk> solar wind solutions were named 2022 top rated products by trust radius.
Trust radius is leveraged by many of our current and potential customers to help objectively pick solutions to support their needs.
Our ninth annual trends report based on extensive surveys and industry research continues to reinforce our strategic direction.
The activity reduction of two straws and detect alert fatigue resource and budget constraints and complexity are all challenges that customers are looking to us to address.
Last but not the least we publish the details of our next generation <unk> system for the benefit of the broader industry.
It is my hope that through the adoption of our secure by design framework, including the build systems, we and others will make a customer environments safer and more secure.
I'm proud of the progress of our teams and the efforts that they display every day.
Formations are never easy.
And the increasing macroeconomic volatility and uncertainty on adding to the challenge.
Having been part of many transformations I am confident that the changes we are driving through the business are the right ones for our customers and for our company.
We are clearly seeing positive results from our deliberate actions and I expect to continue to make progress in the second half of the year.
With that I will turn it over to Bart to further expand on our financial performance and to provide a Q3 and updated full year outlook Buck.
Thanks to the Doctor and thanks again to everyone joining us on today's call.
I'd like to start by reminding everyone of the strategic shifts we are making in our business and.
In 2021, we were focused on retaining our strong customer base.
In 2022, we are turning our attention to reaccelerate growth with a subscription first mentality.
I think that it's important to emphasize that our subscription transition will be multifaceted the.
The first phase of the transition will Intel selling on premises subscriptions at both our existing products and our hybrid cloud observe ability product.
The second phase of the transition as an evolution of the first phase will happen in 2023, as we launched a SaaS version of our observed ability product.
Our second quarter results are reflective of the initial progress with our transition and represent another quarter of execution on our strategy.
Despite increasing macroeconomic volatility and uncertainty.
Turning to the numbers, we finished the second quarter with total revenue of $176 million, which is a slight decline compared to prior year and near the high end of the total revenue outlook, we provided of $174 million to $177 million.
Like other companies with foreign currency exposure, we felt the impact of the decrease in the value of the euro compared to the U S dollar on.
On a constant currency basis, our total revenue would have been approximately $180 million, which is a 2% increase over the prior year.
As a reminder, we no longer adjust our revenue for the impact of purchase accounting. So GAAP total revenue is equivalent to the total non-GAAP revenue measure we have historically reported.
Digging into the revenue details I will start with subscription revenue to go along with our subscription first mentality.
Second quarter subscription revenue was $37 million.
Up 25% year over year.
Our subscription revenue growth reflects the initial success of our subscription first efforts.
As a reminder, and similar to our license and maintenance arrangements as we convert maintenance customers to hybrid Absorbability subscriptions, we recognize the majority of the revenue upfront typically more than 60% and the rest ratably over the subscription periods.
Our subscription IRR as of June 32022 was $148 million, which is an increase of 24% year over year.
This growth is due to execution of our subscription first strategy, including the conversion of a portion of our maintenance base to the hybrid cloud is variability platform.
Maintenance revenue was $114 million in the second quarter, which is a decrease of 5% from the prior year.
As we have discussed recently, our maintenance revenue has been impacted primarily by the conversion of a portion of our maintenance customers to subscription as well as the lower euro to U S. Dollar conversion rate in 2022 compared to the prior year.
Our maintenance renewal rate is trending back to historical norms. We are now at 91% on a trailing 12 month basis and our in quarter renewal rate for the second quarter is at 93%, which is consistent with our historical performance.
We believe this is a testament to the loyalty of our customer base and our focused retention and expansion efforts over the past 12 months.
Note that as we convert maintenance customers to subscription arrangements, we will exclude those customers from their renewal rate calculation.
For the second quarter license revenue was $25 1 million, which represents a decline of approximately 6% as compared to the second quarter of 2021.
Keep in mind that our new perpetual license sales performance will continue to be impacted by our subscription first focus.
As noted previously our increased sales of subscriptions offset the decline in license revenue.
We ended the second quarter with total IRR of $625 million, a slight increase over the prior year.
We finished the second quarter of 2022 with 879 customers, who have spent more than $100000 with us in the last 12 months.
Which is a 13% improvement over the previous year.
This marks the second consecutive quarter with double digit growth in this metric.
We continue to supplement our traditional high velocity low touch sales approach with targeted efforts to build more strategic relationships with our enterprise customers.
As we detailed at our analyst day in November .
I'm also pleased to report that we delivered another quarter of strong non-GAAP profitability.
<unk> quarter, adjusted EBITDA was $67 million, representing an adjusted EBITDA margin of 38%, which is in line with our outlook for the quarter, even as we continued to invest in our business.
Excluded from adjusted EBITDA in the second quarter, our onetime costs of approximately $3 $7 million of professional fees related to December cyber incident.
We expect onetime cyber incident related cost to fluctuate in future quarters, but to continue to trend lower over time.
These onetime cyber costs are however difficult to predict.
Turning to our balance sheet net leverage at June 30 was approximately three nine times, our trailing 12 months adjusted EBITDA.
Our cash cash equivalents and short term investment balance was $778 million at the end of the second quarter, bringing our net debt to approximately $1 1 billion.
Our debt matures in February of 2024, and we expect to reduce our level of gross debt as we get closer to that date and look to a potential refinancing.
I will now walk you through our outlook before turning it back over to Sudhakar for some final thoughts.
I will start with our third quarter guidance and then discuss the changes that we're making for the full year.
For the third quarter, we expect total revenue to be in the range of $180 million to $185 million, representing a slight decrease to 2% growth over prior year.
On a constant currency basis revenue at the low and high end of the range would be approximately $5 million higher and it would represent growth of 2% to 5%.
One of the primary drivers of revenue performance in the third quarter is expected to be an increase in sales to our federal customers.
We are encouraged by our efforts in working closely with our federal customers as we are seeing an improvement in both new sales and renewals from our existing federal customers, who had been slow to reach spending decisions earlier in the year.
Adjusted EBITDA margin for the third quarter is expected to be approximately 39% to 40% non.
non-GAAP fully diluted earnings per share is projected to be 19% to 21 per share assuming an estimated $161 eight fully.
$161 8 million fully diluted shares outstanding.
Finally, our outlook for the third quarter assumes a non-GAAP tax rate of 25% and we expect to pay approximately $7 million in cash taxes during the third quarter.
While our business business model has proven to be resilient during challenging economic conditions.
And we remain confident in our business transition, we are lowering our full year guidance.
This is due to a combination of factors, primarily a weakening of the euro as well as lower expectations in new sales of our products.
Our revised new sales expectations are due to some modest incremental softness in our end markets as well as prudently accounting for the broader macro uncertainty created by worldwide concerns over inflation supply chain disruption issues and challenges in Europe due to the Russia, Ukraine conflict.
Lastly, we are appropriately accounting for the fact that we remain early in our subscription transition.
For the full year, we now expect total revenue to be in the range of $715 million to $725 million.
Which is a slight decrease to a 1% increase over increase year over year.
Compared to prior guidance of $730 to $750 million.
On a constant currency basis, our total revenue guidance would be $730 to $740 million, an increase of 2% to 3% year over year.
Adjusted EBITDA margin for the year is expected to be approximately 39% to 40%.
Which is slightly lower than the 41% we said at the start of the year.
While we are carefully scrutinizing our expenses, we remain focused on our product roadmap and delivering on our on Prem hybrid cloud observer ability products in 2022 as well as the full SaaS version in early 2023.
non-GAAP fully diluted earnings per share is projected to be 81 to 86 per share assuming an estimated $162 6 million fully diluted shares outstanding.
Our full year and third quarter guidance assumes a euro to dollar exchange rate of one point or two.
Yeah.
We still expect an acceleration of our total revenue in the second half of the year as discussed earlier, our federal business is seeing positive signs from a demand generation perspective, and the fourth quarter is typically our best quarter of the year with our commercial customers.
We will continue to lead with a subscription first focus as it relates to new sales and we'll also focus on migrating our maintenance customers to our hybrid observe ability products.
Finally, when you review our GAAP earnings you will notice an impairment of our goodwill our goodwill balance is primarily the result of the take private transaction that occurred in 2016 as well as subsequent acquisitions that added to the amount of goodwill.
A non ratable portion of goodwill of goodwill was transferred to enable as a result of the spin that occurred a year ago.
However, the significant majority of the goodwill remained on our financial statements.
As of June 32022 in light of the current macro environment.
And the continued decline in our market capitalization, along with the lowering of our financial forecast for 2022, we determined it appropriate to perform an interim analysis of a reporting unit.
The macro and economic conditions considered include deterioration in the equity markets evidenced by a sustained decline in our stock price and market capitalization.
As well as those of our peers and major market indices.
The impact of foreign currency fluctuations between the Euro and U S. Dollar on our business and an increase of the weighted average cost of capital primarily driven by an increase in interest rates.
We utilized a combination of both an income and market approach in our assessment and as a result of the interim impairment analysis as of June 30, we determined the carrying value of our reporting unit exceeded its fair value and therefore, a $612 million noncash goodwill impairment charge was recognized for the quarter.
With that I will turn the call back over to Sudhakar for his closing remarks.
Thank you, but despite the tough macroeconomic environment, we continue to make solid progress towards the goals, we outlined during our analyst day in November .
I remain very optimistic that our solutions will address the needs of our customers in any environment and especially in environments such as the one we are in.
We believe that in this climate simplicity digital transformations and efficiencies and productivity gains are all even more relevant and we are ideally suited to support our customers' needs.
Equally our disciplined and highly leverage operating models enable us to continue to focus on business growth, while delivering significant EBITDA margins.
Delivering organic IRR growth, expanding EBITDA margins by operating leverage and optimizing our capital structure remain key priorities.
I am proud of our team for a solid Q2 performance the midpoint of the outlook that <unk> provided still represents year over year growth in a tough macro and foreign exchange environment, and that's a testament to the relevance of our solutions the execution abilities.
<unk> teams and most critically the trust that our customers and partners place in us.
We remain steadfast in executing our mission to help customers accelerate their business transformations, why a simple powerful and secure solutions for multi cloud environments.
And we have an experienced management team, who has led companies through many economic cycles.
Conclude by again thanking our employees partners customers and shareholders for their commitment to Sullivan's bought to Ni will now be happy to address your questions.
As a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Kirk <unk> with Evercore ISI. Your line is open.
Yes, thanks very much.
Just to start.
Can you just give us a little bit more color on the macro backdrop and maybe.
As youre, making these changes to new sales assumptions are there certain products that are holding up better than others, obviously, Europe I imagine sort of a point of weakness for you all but can you just give us some more color in terms of what what exactly youre expecting in the back half of the year, a little bit more on a product basis. Just so we can understand what's getting hit more than maybe some.
Other things are holding up better.
Definitely Coke first hope Youre doing great.
We speak about macro let me is segmented in this in this way.
The bigger headwind that we have experienced so far and that we continue to anticipate in the second half of the.
The year is more of the foreign exchange headwind as as Bob outlined and helped normalize.
So that is still my bigger concern.
In terms of specific geographies, you already mentioned central Europe , as being a soft spot and again due to the water there and other factors that are impacting the euro zone. We are seeing some softness in central Europe , but from a product perspective.
That is not the particular product that's experiencing any kind of softness.
If anything the reception of.
The hybrid cloud availability solutions.
Service management solutions, which are accelerating as well as our database monitoring solutions has been quite robust and well diversified I would say when I say well diversified both geographically as well as segment twice, meaning larger enterprise customers medium enterprise and so on.
So that does not my primary concern at this point my primary concern from a macro standpoint is fill the FX environment as a result of the events in Europe .
Great and maybe just one follow up for Barb just on the renewal rate side, obviously really nice progress on that.
Do you think what should we be sort of assuming on that front and sort of this new low 90% range sustainable.
Are you all thinking about it maybe into the back half of the year. Thanks, Yeah, Yes, as we model it out Kirk I mean, we still think in the 90% to 91% range is what we use whenever we're modeling and.
And then anything that we can anything we do to beat that just gives us a little upside, but we're using 90 to 91.
Super Thank you all.
Thanks Kurt.
Our next question is from Matt Hedberg with RBC capital markets. Your line is open.
Hey, great. Thanks for taking my questions guys Sudhakar, maybe just as a follow up to <unk> question.
Can you give us a little and I think we all appreciate the FX impact is significant I guess on the macro side you guys have such broad exposure globally to SME spending and you mentioned Europe I'm just wondering though can you help us think through how maybe the quarter progressed I mean did you start to see maybe some softening demand as the quarter ended and maybe.
How July is trending thus far just trying to get a little bit better sense of kind of the health of the end markets.
Exclusive of.
Of FX impacts yes.
Yes.
Matt Let me, let me attempt to address it and feel free to ask me a follow up here.
Oftentimes I believe I think that SMB segment is kept as one.
Most of the SME and SMB segment that we support.
Still.
Call. It very professional organizations that are going through their own digital transformations and for them.
Productivity cost reductions elimination of tool sprawl. They all continue to be very important initiatives even in this environment.
What we've been able to do for them is give them more buying flexibility through our hybrid cloud availability solutions and subscription model.
So as we went through the quarter.
I call it normalized for linearity in every quarter I.
I would say demand as we ended Q2 remained robust related to historical levels. So there was no deceleration.
And there is always a week by week radiation, but there was no significant deceleration relative to previous quarters or previous years for that matter and that trend has continued in July I would say.
Great.
That's helpful.
Yeah.
Hello, one that's been around for a long time and been through many economic cycles.
Can you help us think about the value of your solutions to your end customers that may see tightening budgets.
Maybe just talk about quick sale cycles quick implementation times quick ROI, just just sort of curious on from a historical perspective, how all these end markets held up in more challenging economic times.
Absolutely and I touched on it in my prepared remarks, one of the key driving forces behind our solutions is delivering best in class time to value.
I'm a big believer in that historically, we have built incredibly simple an incredibly powerful solution.
And while David targeted let's call. It two on premises type environments. The same fundamental philosophies of simplicity and driving superior time to value have now migrated and translated to let's say, our multi cloud solutions and our hybrid cloud solutions.
So as we educate our sellers and our partners. Our fundamental focus is how do we deliver the best and the most cost effective value to our customers and especially capex constrained environments are in cycles, where you are scrutinizing every investment time to value becomes.
Super pad amount and that's where I believe we shine added to that now is how we are uniquely integrating some of hard assets to not only identify issues in your environment, but also actually help you remediate them. So to the degree that we continue to do that successfully.
Also are able to help significantly improve the productivity of our customers. So in many ways.
Articulation of our value proposition is.
Is the same as it used to be except in broader more complex environments and in multi vendor environments, which again talks to why I believe the deal sizes are growing in some cases and as you noted as we noted.
The number of customers.
Spending more than $100000 with us has grown 13% year over year.
Thank you.
Okay.
Thanks for that question is from <unk> Singh with Morgan Stanley . Your line is open.
Thank you for taking the question.
I wanted to just.
Double check on the assumptions on the guide it sounds like in the quarter you saw a little bit of softness in Europe , So docker and certainly called out that FX is the bigger factor here.
In terms of the guidance that assumed in the back half do you assume that the softness that youre seeing remain sort of relegated to central Europe , Europe , or you're sort of baking in some potential new business softness.
In other regions as well just wanted to understand what you saw versus what youre, assuming for the second half.
Yes, I mean part of what we part of the reason why we brought down the second half sounds. It is just due to some of the just to be prudent about what we think can happen in the second half and just when we're running the scenarios of what the possibilities are so most of it is from FX, but we are we are assuming a little bit of softness not just in central Europe , but a little bit.
In all regions to be honest with you.
Understood very clear. Thank you Bart and then sudhakar the on the product roadmap this year in terms of like.
Okay.
Observer ability solutions integrating that service management.
We're going to be more of an.
And on premise hybrid solution in 2022 can you walk me through.
The eyes of the customer when you released the SaaS versus in 2023 is that something you're expecting them to adopt in 2023 or what's going to be sort of the upgrade our migration triggers to move from this hybrid.
To the ultimately to the SaaS solution.
The adoption triggers if you will definitely.
Think of this as the following while we referred to hybrid and SaaS solutions think of that as a continuum. So in essence, we land at many customers given that they are previously premises based customers, but the hybrid solution and we are able to evolve them into the SaaS version.
Or a mix of it depending on their end.
Deployment needs. So that's I would say the uniqueness of <unk>.
Our solution from a deployment standpoint.
So where we stand today is that the hybrid cloud availability solutions are generally available, meaning that any customer new or existing can adopt and implement those solutions.
Ias mobility solutions, we started releasing early versions of those in April of this year and there's a subsequent tuition that we will be giving customers. This month and then that train continues so we're already getting significant and meaningful feedback from cut.
<unk> on the SaaS solution already in 2022, which motion will only accelerate into 'twenty three so.
So we may segmented as some of the new customers that are adopting let's say net new solar Vince might initially decided to go straight into the SaaS solution in 'twenty, three but for the existing customers it'll be a multiyear pilot migration slash transition, but the comfort we give them.
Is that they can adopt some or all of SaaS.
At the pace at which their business needs. So it's not a forced transition to them and from a technology standpoint, it's a continuum.
Makes complete sense looking forward to it.
Take care.
Okay.
The next question is from Rob Oliver with Baird. Your line is open.
Great. Thanks, guys. Good morning, I appreciate you taking my question.
Sudhakar you called out the impact of partners and the partner ecosystem.
A part of your strategy, which appears to be evolving nicely. So I was wondering if you could talk a little bit about that evolution of you guys from a largely direct business to a partner driven business.
How thats playing out today and then also what role the partners will play in this all important move towards hybrid cloud and the release of <unk>.
Of cloud hybrid cloud <unk> in 'twenty three.
Absolutely.
Rob.
Thanks for the question and.
Responses somewhat multi pronged so I'll try to simplify it as much as I can.
At the outset, I'll say that Sullivan's always had partners as part of its ecosystem. What we are doing now is in many ways expanding in clarifying that partner motion.
So I'll touch on first the global system integrators, we are expanding both our strategic relationships as well as our go to market relationships with our GSI partners.
This is going to be focused largely on the larger enterprises, but also on SME is in the context of some of our GSI is being MSP partners. So there is that technology integration aspect to it as well as a co sell and that resell aspect to it.
So we have a dedicated team working with GSI is and we are gaining some really good traction through that team.
<unk> is the traditional partners in the traditional partner context.
While largely driven in EMEA and <unk> given the partner driven aspect. There. We're also expanding the same principles into the Americas.
And here, what I would say is clarification, an amplification of our partner programs.
Look at our partners as an extension of our sales teams and so we are driving areas such as enablement incentives.
Hearing across those partners.
Across all of these geographies and they obviously get added incentives for not only gaining expertise in our solutions, but also creating demand for our solutions and then last but not least is the hyperscale is themselves I would say, we have co sell motions with them and as such.
<unk> SaaS solutions come more online and become generally available we will have marketplace relationships with them as well.
Great. That's a lot of great color I appreciate it soccer and then one more.
Just you guys expressed.
I think a fairly confident tone relative to the all important Q3 here with it being federal fiscal yearend, obviously extremely important customer for you guys and we're now a few years past the hack and stuff. So if you could just provide a little bit more color on what gives you that confidence around.
While federal sales and federal renewals and maybe Youre seeing early indications already ahead of fiscal your fiscal year end any color there would be really helpful. I appreciate it.
Absolutely.
It's about a year and a half since the sunburst incident.
But even from the time that.
The incident happened.
We have been.
Incredibly committed to our federal customers. Both in terms of how we provided support how we help them analyze any possible impact to their environments, and obviously, giving them confidence.
This.
They also have appreciated not only the engagement of our team, but also the capabilities that we provide to them in terms of products. So our first focus really in I would say in 2021 was ensuring the safety and security of better environment. So it was less about demand Gen and.
Selling activities as much as customer sat customer success activities, which then as the year progressed, we evolved as we gained more of their confidence into being able to propose more of our solutions as well, including database monitoring solutions. So that has consistently and then.
Mentally yielded fruit I would say first through increase and improvement in our renewal rates and more recently in terms of our new business as well and so throughout this year, we have demonstrated progress and obviously Q3. As you said is the is as many call them the Super Bowl.
Of the federal segment to end.
Our teams have done an incredible job of customer outreach pipeline building and now focus on conversion in Q3. Those are the reasons why I believe not only is this success possible in Q3, but I also believe it's sustainable because many customers.
Who bad let's call it on the edge or on the ledge.
Have redoubled re committed themselves to Sullivan solutions.
Very helpful.
Thanks, Thanks, again, guys have a great day.
The next question is from Eric Supergirl with JMP Securities. Your line is open.
Yes, thanks for taking the question.
First off how should we think of the contribution from federal.
Thank you might've been in the 5% to 10% of our revenue range. Historically is it still in that range or has it come down.
And then can you comment.
How you segment your your exposure to customers.
How much do you think is SMB or.
How should we think of your exposure to the SMB market is it pretty much.
Completely SMB or how would you segment of that.
Thanks, Eric.
I'll answer the first part of the question on the federal side.
Youre right as far as the 5% to 10% range total business with the federal government is probably closer to that 10% number, but but not over that number we don't historically breakout and disclosed that separately because it has never exceeded that 10% threshold.
But it is definitely closer to the 10 five.
And I think the Doctor take the SMB side in terms of the SMB I like to call. It semi but broadly speaking that remains a foundation and that will remain the foundation of high velocity motion, but the way I would describe out mix is that mix is growing much more.
It can lead to the mid market and the enterprise customers for a variety of reasons. One is the breadth and capability of our solutions to is the selling motions that we have expanded two and three is the partners that I mentioned.
An earlier question by Rob.
And Eric honestly, we've talked about this in the past we don't we don't do a lot of extinguishing of our customer base between.
SMB or even fortune 500, we have we sell to everybody at all it users and so.
Our average sales price is still less than $10000 per transaction. So.
It's not like we're we're making dramatic shifts.
Are trying to target bigger customers.
With part of our sales motion, but still.
The core of our business is still selling to the it user and trying to solve this problem.
Very good thank you.
Again, Thats star one to ask a question. The next question is from Terry Tillman with Truest Securities. Your line is open.
Oh, Great Hey, good morning, guys. This is Connor passenger Ala on for Terry. Thanks for taking my question I just wanted to ask one around the next Gen system.
Is there a meaningful change in how products are positioned with this new format and are there any financial benefits related to this in the form of R&D efficiency and then maybe if you could just share the timing of this effort how long that'll take thank you.
The Nexgen system is already being implemented internally and now we are in the mode of what I would consider continuous progress continuous improvement.
As I mentioned in my prepared remarks, we've also published what we did externally I would say for the broader benefit of other software vendors and many of our customers who are also creators of software in.
In terms of financial.
Ability or I should say a financial impact.
We did this large lead to improve our supply chain security efforts and we are increasingly being recognized as a leader in improving software security and software security build processes. So I would say any financial impact that I'm thinking.
<unk> will be in that effort.
In fact, I should say of that rather than a direct effort.
Okay, great. Thank you it makes sense.
Thanks Connor.
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Hum.
Okay.
Yes.
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