Q4 2022 SolarWinds Corp Earnings Call

Good morning, and welcome to the solar wind fourth quarter 2022 earnings call.

All participants are in a listen only mode. After the speaker's presentation, we will conduct a question and answer session to ask a question you will need to press star followed the number one on your telephone keypad.

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Tim Crusher Group Vice President of Finance. Thank you. Please go ahead Sir.

Thank you good morning, everyone and welcome to the solar one fourth quarter, two to one or two earnings call.

With me today is Sudhakar, Ramakrishna, our president and CEO and Bob <unk>, our CFO . Following the prepared remarks, we will have a question and answer session.

Call is being simultaneously webcast on our Investor relations website at investors Dot solar when dot com.

On our Investor Relations website, you can also find our earnings press release and 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, our evolution to a subscription first mentality and the timing of the phases of proxy evolution the impact of the global economic and geopolitical environment on our business and our gross level of debt.

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 our filings with the SEC copper.

Copies are available from the SEC on our Investor Relations website.

As a reminder, the financial results presented on this call reflect solar winds.

Standalone business and do not include any contribution from the enabled business we spun off in July 2021.

Furthermore, we will discuss various non-GAAP financial measures on today's call unless otherwise specified why don't we refer to financial measures.

Were you referring to non-GAAP financial measures.

The constellation of the differences between GAAP and non-GAAP financial measures discussed on today's call is 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 fourth quarter of 2022, non-GAAP total revenue is equivalent to our GAAP total revenue.

Finally, we note that financial results discussed on today's call and in our earnings release, our preliminary and pending final review by our external auditors and odds and will be only be final walk we file our annual report on Form 10-K with that I will now turn to.

Call over to Sudhakar.

Okay.

Thank you Tim Good morning, everyone and thank you for joining us today.

As always I'd like to thank our employees customers partners and shareholders for their ongoing commitment to Sullivan.

Looking back at 2022.

Incredibly proud that our team delivered top line growth in a challenging macro environment.

We believe these results are a testament to our business model resiliency the value, we provide to our customers and the entire sullivan team's confidence commitment and attitude.

We had several highlights in the fourth quarter, including strong subscription revenue growth in line with that subscription first strategy.

Continued execution on customer retention, demonstrating the value proposition of our solutions.

Growing traction with our mobility solutions, representing the superior value that we believe we deliver to customers.

Innovation in our service management ideas him and database product lines, representing an increasingly diverse portfolio participating in growing markets.

The cash flow generation and debt.

EBIT margin, reflecting our commitment to our expense and operating discipline delevering, our balance sheet, which Bob will discuss further.

<unk> continued progress with our partners and global system integrators, as we extend our reach to customers through our partners in a scalable and cost effective manner.

I will now touch on some of these before turning it over to Bart for more color on the quarter and our financial outlook for Q1, 2023, and the full year 2023.

In Q4 2022, we delivered total revenues of $108 7 million above the high end of the range, we provided and a slight increase year over year on.

On a constant currency basis, we delivered 2% year over year growth.

I'm excited to report that in Q4 in quarter maintenance renewal rate was 92% and our trailing 12 month renewal rates are now at 93%.

Both of these metrics were negatively impacted by currency headwinds, but even with that I'm happy to report a strong execution.

Attribute these results to the commitment of our team the relevancy of our solutions the resiliency of our business model and the trust that our customers place in us.

We continue to make significant progress with our subscription first strategy and delivered fourth quarter subscription revenue growth of <unk>.

The 5% year over year.

As I've said before I consider our evolution to a subscription not just as a business model change, but as a way of delivering greater value to customers.

While shifting to this strategy has resulted in some total revenue headwinds. We continue to believe it is the right way to deliver customer value and focus on growing annual recurring revenues to over $1 billion.

In the coming years.

We believe the conversion from maintenance to subscription lay the foundation for even more predictable revenue and the opportunity to expand lifetime value with customers.

We ended the fourth quarter of 2022 with 889 customers, who have spent more than 100000 with us in the last 12 months, an increase of 7% over the comparable period in the previous years.

We're increasingly helping our customers reduce two pronged achieved comprehensive visibility across multi cloud environments eliminate alert fatigue and accelerate their digital transformation, all while improving their productivity and doing so has enabled us to win.

Larger deals.

Adjusted EBITDA was $74 5 million.

Renting an adjusted EBITDA margin of 40%, which is about a 38% to 39% outlook, we gave for the quarter.

Now I'd like to take a step back and reflect on what we accomplished in 2022 and how this sets us up for 2023.

2022 was a transformational year for Sullivan as we accelerated our progress on the Sullivan platform and reached significant milestones in the mobility service management and database monitoring.

Simultaneously, we expanded our customer reach by.

Transform partner program critical GSI relationships and the ongoing evolution of our internal teams.

I believe these vital foundations L, but help us.

To be the vendor of choice.

Customers accelerate their digital transformations, and an increasingly multi cloud world and to deliver the best time to value tied to detect issues and time to remediate them.

AI powered solutions.

We are increasingly helping customers eliminate tools problem significantly reduce alert fatigue improve productivity and reduce costs.

In 2020 to evolve from a monitoring vendor.

Observer ability solutions provider.

We launched key new solutions last year.

Hybrid cloud observer ability and cloud native Sullivan observer ability solutions.

We introduced.

Our hybrid cloud Absorbability solution in April and have since launched enhanced detection capabilities powered by artificial intelligence and machine learning.

We believe our hybrid cloud availability solution is the only true hybrid solution that allows customers to migrate from on premises to fad at their own pace.

We are seeing a healthy traction with hybrid cloud that visibility and a long runway for growth.

We believe that customers appreciate the simplicity of packaging and pricing along with the feature richness of hybrid cloud observer ability.

We followed our hybrid cloud availability launch with our cloud native Sullivan observe ability solutions in October available on Azure and AWS cloud.

As we evolve the Sullivan's platform, we aim to deliver observer ability solutions across network infrastructure systems applications and databases digital experiences and log monitoring in one platform across private and public clouds with single pane of glass visibility.

While it is early days, we are excited about Sullivan abilities ability to support every customer regardless of where they are in their cloud journey with the flexibility to deploy on a private cloud public cloud or as a service.

Our observed ability solutions have already earned multiple industry awards and recognitions in recent months.

As we look to 2023, we believe I T environment will continue to grow in complexity and bad debt will remain constrained.

Customers will value solutions that improve their productivity and lower their costs.

I believe our products and services offerings are ideally suited to address these challenges with a compelling observer ability service management and database solutions.

It is also my belief by establishing all our ongoing innovations on the Sullivan's platform, we can deliver even greater simplicity to our customers, while creating the ability to expand the lifetime value of a customer relationship.

With that we invite you to hear more about our solutions at the upcoming virtual Sullivan stay on Veterans Day February 15th.

During the event industry experts and customers will share practical advice on solving today's problems. We had also showcasing new AI powered observer ability capabilities using real world customer use cases.

Lastly, our channel partners are vital in helping customers accelerate their digital transformation with our solutions.

Recall that in October we announced the launch of our solar wind transform program, representing our enhanced focus on channel growth and development across distribution.

The system integrators, and managed service providers and cloud partners.

As an example of our progress during the quarter, we announced an expanded partnership with dry ice a division of <unk> software.

Hey, sell software powers millions of apps at over 20000 organizations, including over half of the Fortune 1000, and global 2000 companies.

We believe the expanded partnership will focus on bringing together the best in class advanced AI ops and to enter observer ability and service management platforms from both companies.

Now I wanted to take a moment to address the macro environment.

As we all know 2022 was a challenging year for the technology industry and the broader community.

Although we generally continue to see healthy demand and commitments from our customers. We are cognizant of the headwinds being a cross expedience across the I T spending industry, while focusing on our strategy and what we can control.

And while we are not immune we believe are highly cost effective solution compelling time to value proposition.

Diversified customer base across sizes, and industries and high velocity transaction model enable us to operate successfully through challenging macro environment.

This is reflected in our Q4 results, including a consistently strong customer retention as demonstrated by our strong renewal rates and our ability to deliver year over year revenue growth in 2022, as I've said, many times, our ability to deliver revenue growth and <unk>.

Generate healthy cash flow, while remaining focused on profitability is a solid testament to the resiliency of our business model and stickiness of our solutions, particularly during challenging periods.

We are and always have been focused on capital allocation disciplined expense management and driving operational efficiencies across all aspects of our business, while focusing on growth and broader subscription transition.

Given the uncertain macro outlook for 2023, we made further optimizations to our expense structure last month as part of our ongoing focus on improving operating margins. Looking ahead, we will continue to monitor the environment closely and we plan to hire selectively.

While seeking to improve profitability in 2023.

We worked hard to build a 30 business model and our unwavering in our belief in our strategy market and ability to execute with that I will turn it over to Bart to expand on our financial performance and provide a Q1 and full year outlook, but.

Thanks, Sudhakar and thanks again for joining us today I want to remind everyone of our 2022 strategic focus on growing with a subscription first mentality.

With this it is essential to emphasize that our subscription transition will be multifaceted.

The first phase of the evolution of Intel's selling subscriptions for our existing on premises products and our hybrid cloud of durability product.

The second phase of the transition began with the recent launch of solar winds observer ability our SaaS solution.

We believe that these two models of subscription growth will persist in our business and our overall focus is to grow subscription or well exercising operating discipline.

These efforts when combined with our other subscription products have resulted in a subscription business with close to $175 million of IRR and our fourth quarter results reflect our ongoing progress with this transition and another quarter of solid execution.

Turning to the numbers, we finished the fourth quarter with total revenue of $187 million, which is a slight increase compared to the prior year and above the total revenue range of outlook, we provided of $178 million to $183 million.

On a full year basis for 2022 revenue finished at $719 million, which was slightly higher than the prior year and well above the total revenue range of the outlook, we provided a $710 million to $715 million in our Q3 earnings release.

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 a constant currency basis, our fourth quarter total revenue would have been approximately $191 million.

Is an increase of 2% year over year.

On a full year basis for 2020 to constant currency revenue would have been approximately $733 million, which is also a 2% growth compared to the prior year.

We ended the fourth quarter with total IRR of 600, and $636 million also up 2% year over year.

And on a constant currency basis, our total IRR would've increased over 3% versus the prior year.

Beginning in Q4, we revise the methodology used to calculate total IRR.

We now exclude the impact of price increases enacted during the maintenance contract renewal and only recognize the price increase impact IRR upon the renewal of the maintenance contract.

While this change does not have a material impact to IRR given our high renewal rates. We felt this was a change that would bring our definition more in line with others in the industry.

We recalculated prior year total IRR to conform to the revised methodology, which is reflected in these year over year growth rates.

Our subscription IRR as of December 31 was $175 million, which is an increase of 30% year over year.

This growth is mainly due to the execution of our subscription first strategy and the conversion of a portion of our maintenance base to the hybrid cloud of durability solution.

Digging into the revenue details our fourth quarter subscription revenue was $50 million up 45% year over year.

With full year subscription revenue of $168 million up 35% year over year.

Our subscription revenue growth reflects the ongoing success of our subscription first efforts.

The transition to a subscription first strategy creates headwinds in the current quarter's total revenue. However, we believe that an increasing percentage of new deals made on a subscription basis will result in higher recurring revenue in the future.

Maintenance revenue was $115 million in the fourth quarter, which is a decrease of 3% from the prior year and.

415 $459 million in 2022, which is a decrease of 4% from the prior year.

As we've discussed recently, our maintenance revenue has been impacted by the conversion of a portion of our maintenance customers to subscription.

And the lower Euro to U S dollar conversion rate in 2022 compared to the prior year.

Our maintenance renewal rate is 93% on a trailing 12 month basis and 92% in quarter renewal rate for the fourth quarter.

These rates are consistent with our historical performance and currency headwinds impacted both.

The return in 2002, and 2022 to our historical renewal rates is a testament to the loyalty of our customer base and our focused customer retention and expansion efforts.

Note that as we convert maintenance customers to subscription arrangements, we exclude those customers from their renewal rate calculation.

For the fourth quarter license revenue was $22 million, representing a decline of approximately 34% compared to the fourth quarter of 2021 and $93 million in 2022, which is a decrease of 19% from the prior year.

Remember that our new perpetual license sales performance will continue to be impacted by our subscription first focus.

As noted previously our increased subscription sales offset the decline in license revenue in the quarter.

We finished the fourth quarter of 2022 with 889 customers, who spent more than $100000 with us in the last 12 months, which is another quarter of improvement over the previous year.

I am pleased to report that we delivered another quarter of strong non-GAAP profitability.

Fourth quarter, adjusted EBITDA was $74 $5 million, representing an adjusted EBITDA margin of 40%, which is above the 38% to 39% outlook, we gave for the quarter.

On a full year basis, adjusted EBITDA was $280 million.

Representing an adjusted EBITDA margin of 39%, which is in line with the outlook, we gave for the year.

Excluded from adjusted EBITDA in the fourth quarter, our onetime costs of approximately $5 $9 million of litigation and governmental investigation costs and other professional fees related to December cyber incident.

We expect onetime cyber incident related cost to fluctuate in future quarters, and these onetime xyrem costs are difficult to predict.

Turning to our balance sheet net leverage at December 31 was approximately three nine times, our trailing 12 months adjusted EBITDA or.

Our cash and cash equivalents and short term investment balance was $149 million at the end of the fourth quarter, bringing our net debt to approximately $1 1 billion.

In November we refinanced our debt and extended the maturity date from February of 2024 to February 2027.

In connection with the refinancing we made a voluntary prepayment of approximately $350 million, which was in addition to the voluntary prepayment of $300 million that we made in September .

We're also pleased that S&P global ratings upgraded our corporate credit rating from B to B plus.

We continue to seek to bring down the leverage further with adjusted EBITDA expansion.

And plan to evaluate opportunities for further debt payments in the coming quarters.

I will now walk you through our outlook before turning it over to Sudhakar for some final thoughts.

I will start with our first quarter guidance, and then discuss our outlook for the full year.

In formulating guidance, we are optimistic that the momentum behind our expanded product portfolio and enhanced go to market strategy. In addition to our strong installed base and customer retention will allow us to grow our topline in Q1 and the full year.

That said, we are mindful of the macro headwinds, which affects all areas of spending and have carefully taken into account FX and the impact of our subscription first business model transitioning and providing our outlook.

Importantly, we've increased our focus on our expense optimization efforts and are committed to improving our already strong profitability profile in 2023.

For the first quarter, we expect total revenue to be in the range of $177 million to $182 million.

Being a 1% year over year growth at the midpoint.

Adjusted EBITDA for the first quarter is expected to be approximately $67 million $67 million to $70 million.

non-GAAP fully diluted earnings per share are projected to be 15 to 17 cents per share assuming an estimated $163 9 million fully diluted shares outstanding.

And finally, our outlook for the first quarter assumes a non-GAAP tax rate of 26% and we expect to pay approximately $6 8 million in cash taxes during the first quarter.

For the full year, we expect total revenue to be in the range of $725 to $740 million.

Representing 2% year over year growth at the midpoint.

Adjusted EBITDA for the year is expected to be approximately $290 million to $300 million, representing a 5% year over year growth at the midpoint.

As you will notice we are now providing adjusted EBITDA guidance in lieu of the previously provided adjusted EBITDA margin aligned with our commitment to deliver EBITDA growth on a dollar basis in 2023.

While we continue to manage our expenses prudently we remained focused on our product roadmap robust core execution and subscription first strategy.

We have made meaningful investments in our product portfolio and go to market strategy and believe that these investments are starting to pay dividend. We will continue to make selective investments to support our product innovation.

Prioritizing our commitment to improving efficiency and profitability.

non-GAAP fully diluted earnings per share is projected to be 69 to 74 per share assuming an estimated $165 9 million fully diluted shares outstanding.

Our full year and first quarter guidance assumes a euro to dollar exchange rate of 105 to one.

With that I'll turn the call back over to Sudhakar for his closing remarks.

Thank you, but the midpoint of the outlook <unk> provided represent year over year growth, which reflects our continued belief in the relevance of our solutions the execution ability of our teams and most critically the trust our customers and partners place in us.

I'm very pleased with the momentum building for our new innovations and I am confident as ever in the long term trajectory of our business. We continue to weather the economic conditions in a disciplined manner and make progress across several growth vectors as.

As we look to 2023 I'd like to reiterate three key near term priorities for us.

First we have a robust renewal business with over 90% renewal rate, we remain very focused on estimated pension and expansion efforts as we have been for the past 18 months.

Second we continue to aggressively seek to drive subscription adoption across our businesses.

While this has resulted and will likely continue to result in some variability in our reported revenue that accelerated shift to subscription is consistent with how our customers want to consume our products and the key to our long term strategy to achieve a $1 billion in IRR at mid forties.

Adjusted EBITDA margins in the coming years.

We believe the increasing subscription base also provides an even more solid foundation for our revenue and margin expansion efforts.

And third we continue to exercise expense discipline in a challenging macro environment. As we begin 2023, we expect to continue to look for opportunities to invest selectively managed expenses in a disciplined manner and improve our operating margins we have in expedia.

Management team that has led companies through many economic cycles, and we have demonstrated consistent discipline with operational efficiencies, while appropriately targeting our investments in attractive growth markets.

We believe our resilient business model should allow us to deliver continued healthy levels of growth and profitability and as you heard from but we are focused on margin expansion are guiding to $290 million to $300 million of adjusted EBITDA for 2023.

I'll conclude again by thanking our employees partners customers and shareholders for their commitment to Sullivan's Bob and I will now be happy to address your questions.

If you would like to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press star one again.

Our first question comes from Matt Hedberg from RBC capital markets. Please go ahead. Your line is open.

Great. Thanks, guys for the questions Sudhakar for you.

One of the things that a lot of us are talking about a lot of investors.

End users are the whole idea of cloud optimization.

With your increased focus on observer ability.

Could you talk about maybe how your SME customers are thinking about cloud optimization is that impacting spend or maybe just give us a little color on that would be helpful.

Absolutely.

I'm sure you've seen more broadly there is definitely somewhat of a deceleration in cloud spend across public clouds.

Here's where our hybrid cloud solutions have come in really handy because the way we design. The solutions was not force a particular deployment approach on the customer and instead give them a way where they can choose to deploy wholesale in the cloud some in the premises and extended so what that has allowed.

It has to do is essentially pace that investments are.

Alongside.

The ability for them to evolve to the cloud. So that's come in really handy because ours is truly a hybrid solution now in terms of cloud spend and overall absorbability itself as Spotify Sullivan's platform. We are also able to evolve it says that they can keep an eye on how the.

Construction spending is going in the context of infrastructure observer ability and optimization, but.

But thats more of a future thing the more immediate benefit that customers get is but leveraging of the hybrid cloud availability, which has seen some really good traction in this environment.

Got it thanks Bart.

You guys had good results with <unk> results relative to your guide and expectation can you I don't think you necessarily counted on linearity, though can you talk about I mean, you guys have such.

Expansive view of the world.

Large customer base.

How the quarter progressed.

August was backend loaded, but maybe just spending patterns through the end of December and what you've seen through through January .

So yes, I mean, what I would tell you Matt is that the fourth quarter for US is always our biggest quarter on the commercial side of that business and.

And obviously that happened again this year from a linearity perspective. The good thing is is that our business model doesn't have the typical hockey stick.

We have bookings.

Progression throughout the quarter and.

And that held up this year just like it has in the past as well. So so all in all you know it was a strong quarter for us from a from a from a revenue standpoint and from a booking standpoint.

Definitely compared to what the guidance that we gave back in the third quarter. So.

What I would tell you is is that.

For us, we're continuing to see improvement.

Across the board.

You saw that in our results from as they trended throughout the year.

And for us from a seasonality standpoint two.

<unk> 2022 is just like every other year, we saw improved performance as we move throughout the year.

Got it thank you.

Our next question comes from Erik <unk> from JMP Securities. Please go ahead. Your line is open.

Yeah. Thanks for taking the question.

Hey, first off what what should we be modeling for interest expense given the restructured the debt and then secondly can you expand a little bit in terms of how we should be.

The modeling for your cost reductions can you comment a little bit about what kind of.

Further changes you've made and how we should be thinking of opex growth from 'twenty two into 'twenty three.

Eric sure. Thanks for the question I'll take this one.

As it comes to interest expense.

Model 100, or $110 million of cash interest expense and this is in line with how we refinance the debt.

And our base of financing.

And also we have noncash interest expense as you may expect.

At full supply and we expect that to be call. It around.

$8 million to $10 million.

But thats the high level interest expense assumption.

As it comes to expense optimizations to barge and so dockers points, we will continue to be very prudent as it comes to our investments and be very selective.

And we'll make sure we're making the right investments at the right places, where we are expecting the highest return.

So as we go through 2023, you may expect to see that same trend of.

Expense management, and prudent and we will observe expenses very closely and just make sure we're making the right tradeoffs with focusing expanding our margin as well as.

EBIT dollar.

Okay.

Okay. Thank you.

Our next question comes from Patrick Schultz from Baird. Please go ahead. Your line is open.

Hey, guys. Thanks for taking my question just with the two observer ability solutions launched during 2022. It sounds like initial customer success has been pretty positive are you able to provide any customer stats around the success on what's embedded for expectations in 'twenty three and then maybe just any color you can ride on what types of conversations you're having with customers.

So we are not splitting out customer counts and revenues at this point, but a large part of that is definitely implied in a continued healthy subscription growth rate as I mentioned on the call. They grew about 45%.

In Q4 related to last year.

That will continue to be a trend for us in terms of focus.

And my expectation is that we.

Demonstrate progress across both sites.

And as I was mentioning to Matt's question earlier, the fact that we have hybrid cloud Absorbability comes in really really handy at times when customers may either be hesitant about cloud spend or let's call. It a little bit more cautious than they were even in 2021 and 2022.

Providing the optionality helps them a lot and the way too.

Think about our solution is that it's actually a continuum, while we may have introduced in two.

Parts of the year will be merging them such that customers have a seamless migration, let's say they choose to have 100% SaaS at some point down the road. They will have the optionality to do that.

What I will say is that customers absolutely love, how we have.

Packaged the solution for them, obviously prized it on a per node basis.

And the feature richness of it because they don't really have to buy a lot of tools are in fact are able to consolidate a lot of tools, including third party vendor tools to deliver to take leverage of our solutions.

I appreciate the color there and then just on the international market. It seems like the macro environment in Europe is still impacting sales cycles, and causing some increased Neil scrutiny, but from an overall pipeline perspective can you comment on any trends you are seeing throughout the quarter.

Yes, absolutely.

Pipeline for us including in Europe .

Has actually been quite robust and increasing.

But the way we're modeling it in light of call. It the broader macro conditions and the extra scrutiny that you mentioned is that we are assuming a lower pipeline conversion in our numbers than let's say would be the norm.

But on the flip side, we continue to see significant demand.

Presented by our pipeline increases.

Excellent. Thanks for taking my question guys.

Thank you.

Our next question comes from Sandra Zhang from Morgan Stanley . Please go ahead. Your line is open.

Thank you for taking the questions I had some it's more kind of higher level questions sort of beyond the current macro environment. We've been talking a lot about the observer ability to opportunity and it's really nice to see you guys execute on the roadmap.

This year.

On the hybrid cloud as well as deep.

Cloud native solution, but you sort of laid out in your investor presentation.

And in your script database.

<unk> monitoring.

As well as our service management and I wanted to talk about those two opportunities, particularly dark or how should we think about the contributions of the.

Those opportunities to your revenue growth profile over the next couple of years can you sort of see that sort of incremental to the core observer ability opportunity or do you see that could be.

Meaningful contributors ended up themselves.

First the latter Sanjay thanks for the question, we look at them as meaningful individual contributors to the business. That's the reason why.

I do not observe ability is a very strong pillar of others, including our us trial monitoring solutions.

Like to think of it as we are participating in three growth market submit service management and database and as of now they are increasing meaning the service management and database monitoring parts of our business.

Robust growers.

Because of the size that they have currently.

You will not see the full impact of their growth rates that being said the way to think about this as we move forward is that as a solar wind platform itself matures.

Lot of the functionality will ride on the same platform.

So for instance, when we think about observer ability and we talk about database observer ability as a element that comes out.

From the innovation of our database team.

Similarly, we'll integrate automation and remediation with observer ability and Thats contributed by the service management team. So there is a standalone motion.

As you know in the market as well as a more integrated motion, which is why I am excited about how Arabs ability solutions be very differentiated than let's say simply observing and reporting.

Understood that's very interesting.

Also in your Investor deck, you have sort of.

Preliminary initiatives and goals for the team in 2024, and one of them was around.

Product led growth, which in some ways I kind of thought of solar winds as sort of the.

An early pioneer a product led growth.

That section.

Notably digital sales model.

Sure.

Well over a decade now can you talk to a little bit a little bit about what you sort of need in 2024 about maybe a product led growth what are the analytics on that Tim.

Capability standpoint.

You are looking to build that you don't necessarily have today absolutely.

That's a good callouts ended that's more of a evolution slash extension you are right about saying in Sullivan historically has been in many ways a product led growth company in the broad connotation of product led growth.

Broadly speaking, we used to call the motion download try and coat. So that is how the whole velocity motion was nurtured the way to think about this in this evolution is the download try and co promotion essentially become a try and buy with greater embedded technologies to both Cree.

Demand and prompt and demand with customers to think of our velocity motion accelerating leveraging new technology paradigms as opposed to a completely new paradigm being created.

Understood.

Thank you very much.

Thank you Sandy.

Our next question comes from Conor Pasteurella from <unk> Securities. Please go ahead. Your line is open.

Perfect. Thank you and good morning, guys Connor on for Terry Tillman.

Maybe you want to start also with a more high level question. So just as we're thinking about the long term targets of achieving $1 billion.

And mid 40, <unk> EBITDA margins, if we grow 10%. It takes about five years to get there and then figure out about 5% takes around 10 years.

Yes, we think about these longer term targets, where do we think in reality. This will kind of shake out would be closer to five year 10 year, Mark just any color around the space, It's really helpful.

Yeah. Good question Carter I mean, when we're thinking about it.

We originally talked about having a target of those those numbers in 2025, we need to see some acceleration in revenue.

Which we saw in the back half of the year. So.

If that trend continues then we think these are targets that we think we can we can hit in the next five or six years definitely not thinking about it on a 10 year horizon, we need to see.

More acceleration on the top line and then and then Youll see Youll see us deliver.

The targets that we're talking about and kind of we have taken are absorbed the impact of subscription transition in both 2021, such say 'twenty, two and 'twenty three and we'll continue to do that but as you can imagine that also has a compounding effect as we get into the out years.

And so I don't believe that is fully.

Internalized absorbed our model yet and that's the reason why I think the time horizon is near a rather than further.

Got it okay, yes that makes some sense, maybe just as a quick follow up we saw the announcements once ago chatter as being appointed as the President of America sales and global Channel, maybe just any progress report on getting them ramped up on the solar wind platform. Thank.

Thank you guys.

Yes, So Chad has been here now for almost six months.

And he has I would say fully up to speed and in fact on the road to meet our global channel partners in EMEA and APG very sharply so he and his team not only have been driving call. It the cadence around our partner program.

But also scaling our Americas business and really supplementing our high velocity motion with what I would call selective high touch motion, because we see increasing opportunities as I noted in the script as well as getting our partners more excited about our future and the possibilities that we offer.

Them because.

Because there's a lot of opportunities for partners to engage with Sullivan solutions and become even more profitable than they previously were.

Great. Thank you.

As a reminder to ask a question. Please press star followed by the number one on your telephone keypad.

Next question comes from Kash Rangan from Goldman Sachs. Please go ahead. Your line is open.

Hello, Sudhakar embarked nice to talk to you guys.

Also a perspective on your subscription transition and are there incremental tweaks to the subscription product offering that should incentivize the customer to.

To move away from our big installed base of licenses.

And also commentary with that are there things that youre doing on the go to market side to sweeten up incentives.

On the product side from a go to market side, what are the things that you could do to accelerate this transition and also if you have a view on the maintenance fallout the folks that are converting to subscription what are they doing.

We're just sitting out to wait for a certain level of brokerage brinci with the <unk>. So they can jump on board.

Anything any other dynamics. Thank you so much once again good to connect with you guys.

Thank you Kash and always good to hear your voice.

Both.

Vantiv set of questions, where are very relevant and something that we have been actively working on.

Number one is that as I mentioned the hybrid cloud availability product was introduced in April with another extension in July and further in October what I can say cash is that.

First focus was to ensure that customers saw both value and feature richness as well as the simplicity of pricing and packaging. So we evolve the whole thing to node based pricing, which gives great pricing flexibility for our customers.

And so that has been a significant reason why customers have been evolving. So the approach that we took was instead of stopping.

One model and lease and starting with a new one.

We decided as maintenance renewals come up for expiry is when reposition and pitch hybrid cloud availability to our customers and we have used that as a motivation to transition and there I would say the conversion ratios have been very high and even though it is less than a year since we introduced the product line.

We've seen steady and accelerating progress all through.

2022.

And my expectation is that it continue in 'twenty three and this is an opportunity for us as you know we have a very large installed base and a ah.

Our growing installed base as well, but this can be a multiyear growth opportunity for us is the way we are thinking.

We have also on the other side to your point about the go to market given our incentivize both our partners as well as our salespeople to position that.

<unk> and better because of the value proposition.

And finally, what I'll say is that as we've converted maintenance to subscription. We are also experiencing meaningful revenue multiples on that which as you know we will have a compounding effect as we get into 'twenty three 'twenty four 'twenty five and beyond.

And also if I could follow up on the observatory set back or are you observing.

The market.

Tighter coupling of the trends that are seen in the public cloud recently declining consumption or do you think there is more of a secular growth story for for this particular product.

Ali for Ace or somewhere in between and that's it for me. Thank you.

Yes, absolutely so both hybrid cloud availability, which is what I just described cash as well as our call at this SaaS Absorbability solutions are complementary and supplementary from our standpoint and the approach that we have taken is because we are able to do a lot of tooth consolidation.

Especially in this macro environment it becomes even more compelling.

To them as we bridge call it the premises to the cloud.

In terms of how customers are viewing our solutions. It is a combination of helping them optimize costs at one level and increasing productivity at another 11. So it's more of a must have product as opposed to a nice to have offering and then going back to that one of the previous questions.

By integrating service management onto the same platform being able to give them even more efficiencies from a overall deployment standpoint. So this is a long term.

Keller growth trend in my opinion, both in the context of three distinct.

Served markets as well as a more unified served market as well.

We have no further questions in queue I would like to turn the call back over to the Doctor Ramakrishna for closing remarks.

Thank you very much and thanks again for everyone, who joined our call and for your ongoing support we're very excited about the prospects at Sullivans and we'll continue to execute and continue to report out on a regular basis.

This concludes today's conference call. Thank you for your participation you may now disconnect.

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