Q1 2024 SolarWinds Corp Earnings Call
Operator: Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the SolarWinds 2024 first quarter earnings call. All lines have been placed on mute to prevent any background noise.
Thank you for standing by my name is Kathleen and I will be your conference operator today.
Kathleen: At this time I would like to welcome everyone to the solar Ranch 2024 first quarter earnings call.
Kathleen: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Kathleen: If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
Kathleen: If you would like to withdraw your question Brett started once again. Thank you I would now like to turn the call over to Pimco Roger Group Vice President of Finance. Please go ahead.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Tim Karaca, Group Vice President of Finance. Please go ahead.
Tim Karaca: Thank you. Good morning, everyone, and welcome to the SolarWinds first quarter 2024 earnings call. Sudhakar Ramakrishna, our President and CEO, and Bart Kalsu, our CFO, are with me today. Following our prepared remarks, we will have a question and answer session. This call is being simultaneously webcast on our Investor Relations website at investors.solarwinds.com. You can also find our earnings press release and the summary slide deck, which is intended to supplement our prepared remarks during today's call.
Unknown Executive: Thank you good morning to everyone and welcome to the solar winds first quarter 2024 earnings call.
Roger: The darker Ramakrishna, our president and CEO and backup to our CFO are with me today.
Roger: Following our prepared remarks, we will have a question and answer session.
Roger: This call is being simultaneously webcast on our Investor relations website at investors that solar winds dot com.
Roger: You can also find our earnings press release, and summary, slide deck, which is intended to supplement our prepared remarks during today's call.
Tim Karaca: 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 continued evolution to a subscription-first mentality and the timing of the phases of such evolution, our expectations regarding our partner ecosystem, the SEC enforcement action, the impact of the global economic and geopolitical environment on our business, and our growth 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.
Roger: Please remember that certain statements made during this call are forward looking statements.
Roger: Including those all turning to our financial outlook.
Roger: Our market opportunities our expectations regarding customer retention.
Roger: Continued evolution to a subscription first mentality and the timing of the phases of such evolution, our expectations regarding our partner ecosystem.
Roger: <unk> enforcement actions the impact of the global economic and political environment on our business and our gross level of debt.
Roger: These statements are based on currently available information and assumptions and we undertake no duty to update this information except as required by law.
Tim Karaca: 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. Copies are available from the SEC on our Investment Relations website. We will discuss various non-GAAP financial measures on today's call. Unless otherwise specified, when we refer to financial measures, we will be referring to non-GAAP financial measures. A reconciliation of the differences between GAAP and non-GAAP financial measures and the definition of other financial metrics discussed on today's call are available in our earnings press release and summary slide deck on the Investor Relations page of our website.
Roger: Statements that are subject to a number of risks and uncertainties, including to numerous risks and uncertainties highlighted in today's earnings release, and our filings with the SEC.
Roger: Copies are available from the SEC on our Investor Relations website.
Roger: We will discuss various non-GAAP financial measures on today's call.
Roger: Unless otherwise specified why don't we refer to financial measures, we will be referring to non-GAAP financial measures.
Roger: A reconciliation of the differences between GAAP and non-GAAP financial measures and the definition of other financial metrics discussed on today's call are available in our earnings press release and summary, slide deck on the Investor Relations page of our website.
Tim Karaca: Finally, we note that the financial results discussed on today's call and in our earnings release are preliminary and pending final review by us and our external auditors and will only be final once we file our quarterly report on Form 10-Q. With that, I will now turn the call over to Sudhakar.
Roger: Finally, we note that the financial results discussed on today's call in our earnings release, our preliminary and pending final review by Us and our external auditors and we will only be a final once we file our quarterly report on Form 10-Q.
Roger: I will now turn the call over to Stocker.
Sudhakar Ramakrishna: Thank you, Tim, and good morning, everyone. Thank you for joining us today.
Stocker: Thank you Tim and good morning, everyone. Thank you for joining us today.
Sudhakar Ramakrishna: As always, I'd like to thank our employees, customers, partners, and shareholders for their ongoing commitment to SolarWinds. I'm pleased to report that we delivered a strong start to the year once again, exceeding our guidance across our key metrics and demonstrating the compelling value of our platform solutions and the strength of our business model. In particular, our ongoing evolution from a provider of monitoring tools to a comprehensive, full-stack provider of observability, database monitoring, and service management solutions across hybrid and multi-cloud environments is increasingly having a positive impact on our ability both to support customers in their business transformations and to achieve our strategic and financial objectives.
Stocker: As always I'd like to thank our employees customers partners and shareholders for their ongoing commitment to Sullivan.
Stocker: I am pleased to report that we delivered a strong start to the year once again exceeding our guidance across all key metrics and demonstrating the compelling value of our platform solutions and the strength of our business model.
Stocker: In particular, our ongoing evolution from a provider of monitoring tools to a comprehensive full stack provider of observer ability database monitoring and service management solutions across hybrid and multi cloud environments is increasingly having a positive impact on that.
Stocker: Ability both to support customers in their business transformations and to achieve our strategic and financial objectives.
Sudhakar Ramakrishna: I'm pleased with the strong execution of our teams, resulting in sustained ARR growth and the strongest quarterly adjusted EBITDA margin in over three years. Now, turning to business highlights from this quarter. In Q1 2024, we saw total revenue of $193 million, above the high end of the range we provided and representing year-over-year growth of 4%. Our total ARR grew 7% in Q1.
Stocker: I am pleased with the strong execution of our teams resulting in sustained.
Stocker: Growth and the strongest quarterly adjusted EBITDA margin in over three years.
Stocker: Now turning to business highlights from this quarter.
Stocker: In Q1 2020 full results total revenue of $193 million.
Stocker: About the high end of the range, we provided and representing year over year growth of 4%.
Stocker: Our total <unk> grew 7% in Q1 of 2024.
Sudhakar Ramakrishna: We continue to experience strong adoption of our hybrid cloud observability solutions and expect to exceed $100 million in total ARR for these solutions in the second quarter. This significant milestone is a result of the ongoing conversion of our maintenance base with a healthy conversion factor, as well as the acquisition of new customers. We believe that tools consolidation, cloud modernization, and simplicity are the key driving factors, and there continues to be a significant incremental opportunity ahead of us.
Stocker: We continue to experience strong adoption of our hybrid cloud availability solutions and expect to exceed a $100 million in.
Stocker: And Tobey IRR for these solutions in the second quarter.
Stocker: This significant milestone is a result of the ongoing conversion of our maintenance space with a healthy conversion factor as well as the acquisition of new customers.
Stocker: We believe that tools consolidation cloud modernization and simplicity are the key driving factors and there continues to be a significant incremental opportunity ahead of us.
Sudhakar Ramakrishna: With the ongoing success of our Subscription First strategy, in the first quarter, we delivered subscription growth of 26 percent and subscription ARR growth of 36 percent. We delivered first quarter adjusted EBITDA of $92 million, about the high end of the range we provided and representing growth of 19% year over year and an adjusted EBITDA margin of 48%, up 6 percentage points year over year. And, as I mentioned earlier, this represents the highest quarterly level in over three years. Our 1st quarter in-quarter maintenance renewal rate was 98%, and our trailing 12-month maintenance renewal rate was 97%, an increase from 96% as of the end of the 4th quarter.
Stocker: With the ongoing success of our subscription first strategy in the first quarter, we delivered subscription growth of 26% and subscription <unk> growth of 36%.
Stocker: We delivered first quarter adjusted EBITDA of $92 million.
Stocker: The high end of the range, we provided and representing growth of 19% year over year, and adjusted EBITDA margin of 48% up six percentage points year over year.
Stocker: And as I mentioned earlier this represents the highest quarterly level in over three years.
Stocker: First quarter in quarter maintenance renewal rate was 98% and our trailing 12 month maintenance renewal rate is at 97% an increase from 96% as of the ended the fourth quarter.
Sudhakar Ramakrishna: And we delivered first quarter total ARR growth of 7% year-over-year with continued execution of our subscription-first strategy that's rooted in delivering the best time-to-value, time-to-detect, time-to-remediate issues for customers in their multi-cloud environment. On April 2nd, we celebrated our 25th anniversary as a company, and I want to take a moment to reflect on what we have accomplished and what it means for us. SolarWinds was founded in 1999 by a network engineer with a goal of building tools designed to simplify the lives of IT professionals.
Stocker: And we delivered first quarter total <unk> growth of 7% year over year with continued execution of our subscription first strategy that diluted and delivering the best time to value time to detect and remediate issues for our customers in their multi cloud environments.
Stocker: On April 2nd we celebrated our 20 <unk> anniversary as a company and I want to take a moment to reflect on what we have accomplished and what it means for our future.
Stocker: Tournaments was founded in 1999 by a network engineer with a goal of building tools designed to simplify the lives of it professionals.
Sudhakar Ramakrishna: Through our team's focused execution over the years, we now have the privilege of serving over 300,000 customers around the world. Hearkening back to our founding, our purpose is to enrich the lives of the people we serve, including our employees, customers, partners, and shareholders. This purpose continues to guide us as we help customers accelerate their business transformations via simple, powerful, and secure solutions. We've evolved from being a provider of monitoring tools to a provider of powerful, full-stack observability, database performance monitoring, and service management solutions.
Stocker: Through our team's focused execution over the years, we now have the privilege of serving over 300000 customers around the world.
Stocker: Harkening back to our founding our purpose is to enrich the lives of the people, we serve including employees customers partners and shareholders.
Stocker: This purpose continues to guide us as we help customers accelerate their business transformations why are simply powerful and secure solutions.
Stocker: Yes.
Stocker: Evolve from being a provider of monitoring tools to a provider of powerful full stack observer ability database performance monitoring and service management solutions.
Sudhakar Ramakrishna: We believe our comprehensive platform enables our customers to consolidate tools, reduce the complexities they face, lower costs, and improve their productivity. We provide our customers with the flexibility to move at their own pace in their digital transformation journeys by offering a robust set of hybrid capabilities in addition to cloud-native ones. As I look to our future, I'm confident in our team's ability to identify new opportunities, prioritize our investments, execute with discipline, continue serving the emerging needs of our customers, and delivering strong financial results.
Stocker: We believe our comprehensive platform enables our customers to consolidate tools reduce the complexity, they face lower costs and improve their productivity.
Stocker: Provide our customers with the flexibility to move at their own pace in their digital transformation journeys by offering a robust set of hybrid capabilities. In addition to cloud native.
Stocker: As I look to our future and confident in our team's ability to identify new opportunities prioritize our investments execute with discipline continue serving the emerging needs of our customers and delivering strong financial results.
Sudhakar Ramakrishna: I will now share a few key product and solution updates we believe will better serve our customers and aid us in increasing our relevance to them. We expanded our observability offerings, which already provide rich support for devices, containers, SD-WAN, and cloud types with enhanced support for Azure, Palo Alto, ServiceNow, Aruba, and others.
Stocker: I will now share a few key product and solution updates, we believe will better serve our customers and aid us in increasing our relevance to that.
Stocker: We expanded our observer ability offerings already reached the point of devices containers SD Wan and cloud types with enhanced support for Azure Palo Alto service now Aruba others.
Sudhakar Ramakrishna: These enhancements further improve customer capabilities to consolidate their tools, achieve hybrid visibility, and create node and lifetime value expansion opportunities for us. We continue to enhance our common AI services framework across our observability and service management solutions. These services are designed to reduce alert fatigue and help our customers manage the complexity of their environment.
Stocker: These enhancements further improve customer capabilities to consolidate their tools.
Stocker: <unk> hybrid visibility and create node and lifetime value expansion opportunities for us.
Stocker: We continue to enhance.
Stocker: Common AI services framework across our observer ability and service management solutions.
Stocker: These services are designed to reduce alert fatigue and help our customers manage the complexity of their environment.
Sudhakar Ramakrishna: We believe we have the broadest platform support in database monitoring. We have added significant performance enhancements for Postgres SQL and remain very committed to open source database technology. Finally, consistent with our Secure by Design initiatives and commitment, we are proud to have announced last month that we are the first software provider to publish a self-attestation in alignment with a new cybersecurity and infrastructure security agency secure software development framework.
Stocker: We believe we have the broadest platform support in database monitoring.
Stocker: Added significant performance enhancements for both Greg SQL and remain very committed to open source database technologies.
Stocker: Finally <unk>.
Stocker: Consistent with that take care by design initiatives and commitment. We are proud to have announced last month that we had the first software provider to publish a self attestation in alignment with the new cybersecurity and infrastructure Security agency secure software development framework.
Sudhakar Ramakrishna: We believe that these initiatives further the public-private partnerships that we have been fostering. With the Go-To-Market Fund, we have made significant progress aligning our actions with our Subscription First Strategy, including investing in our partner program to increase our reach efficiently and cost effectively. Our recent transformed partner summits further amplify the opportunity we can create by working with and through our partners. Our partners, including distributors, resellers, global system integrators, and cloud service providers, continue to contribute to our success.
Stocker: We believe that these initiated further the public private partnerships that we have been fostering.
Stocker: On the go to market front, we have made significant progress aligning our motion with our subscription first strategy, including investing in our partner program to increase our reach efficiently and cost effectively.
Stocker: Recent transform partners summit further amplify the opportunity we can create by working with and through our partners.
Stocker: Our partners, including distributors resellers global system integrators, and cloud service providers continue to contribute to our success.
Sudhakar Ramakrishna: These and other go-to-market efforts continue to build on our world-class inside sales force, complemented by our simple, powerful, and secure solution. As I turn the call over to Bart, I will reiterate my optimism that we will continue to accelerate the gains that are a direct result of our transformation efforts across all aspects of the business over the past three years. Specifically, we believe the ongoing uptake of our observability solutions, along with our database and service management solutions, will continue to support and sustain ARR growth while we invest judiciously in the future, resulting in continued adjusted EBITDA growth and margin expansion. I will now ask Bart to expand on our financial performance and provide our second quarter and full year 2024 outlook. Bart.
Stocker: These and other go to market efforts.
Stocker: Continue to build on our world class inside sales motion.
Stocker: Complementing it by a simple powerful and secure solutions.
Stocker: As I turn the call over to but I will reiterate my optimism that we will continue to accelerate the gains that are a direct result of our transformation efforts across all aspects of the business over the past three years.
Stocker: Pacifically, we believe the ongoing uptake of our availability solutions, along with our database and service management solutions will continue to support and sustain our growth while we invest judiciously in the future, resulting in continued adjusted EBITDA growth and margin expansion.
Speaker Change: I will now ask but to expand on our financial performance and provide second quarter and full year 2020 for outlook.
Bart Kalsu: Thanks to Dr. Oz and thanks to everyone who joined us on the call. We had a strong first quarter as we continue to drive strong ARR growth and increase the mix of our predictable recurring revenue while demonstrating sustained double-digit adjusted EBITDA growth. We're off to a good start to the year, and we believe we are on a positive trajectory in 2024. Turning to the numbers, we finished the first quarter with total revenue of $193.3 million, a 4% increase compared to the prior year and above the high end of $192 million of the outlook for total revenue that we provided last quarter. We ended the first quarter with a total ARR of $695 million, up 7% year over year. Our subscription ARR at the end of the first quarter was $251 million, an increase of 36% year-over-year.
Speaker Change: Thanks, <unk> and thanks to everyone, who has joined us on the call.
Speaker Change: We had a strong first quarter as we continued to drive strong <unk> growth and increase the mix of our predictable recurring revenue, while demonstrating sustained double digit adjusted EBITDA growth.
Speaker Change: We're off to a good start to the year and we believe we are on a positive trajectory in 2024.
Speaker Change: Turning to the numbers, we finished the first quarter with total revenue of $193 3 million a.
Speaker Change: A 4% increase compared to the prior year and above the high end of $192 million of the outlook for total revenue that we provided last quarter.
Speaker Change: We ended the first quarter with total IRR of $695 million up 7% year over year.
Speaker Change: Our subscription IRR at the end of the first quarter was $251 million, an increase of 36% year over year. This growth continues to be driven by the execution of our subscription first strategy.
Bart Kalsu: This growth continues to be driven by the execution of our Subscription First strategy. As mentioned last quarter, we now provide the number of customers who have annual recurring revenue of greater than $100,000 as we believe that total ARR from customers provides insight into the quality and repeatability of our business. We had 1,021 customers with over $100,000 of total ARR, representing 16% growth over the prior year.
Speaker Change: As mentioned last quarter, we now provide the number of customers who have annual recurring revenue of greater than $100000. As we believe that total IRR from customers provides insight into the quality and repeat ability of our business.
Speaker Change: We had 1021 customers with over $100000 of total IRR, representing 16% growth over the prior year.
Bart Kalsu: Digging into the revenue details, our first quarter subscription revenue was $69 million, up 26% year over year. The increase in subscription revenue reflects the success of our Subscription First Strategy, which includes converting a portion of our maintenance base to our subscription product. Maintenance revenue was $112 million in the first quarter, roughly flat compared to the prior year, despite the conversion of a portion of these customers to our subscription product. Our maintenance renewal rate is 97% on a trailing 12-month basis and was 98% for the first quarter. To remind you, as we convert maintenance customers to subscriptions, we exclude those customers from our renewal rate calculation.
Speaker Change: Digging into the revenue details our first quarter subscription revenue was $69 million up 26% year over year.
Speaker Change: The increase in subscription revenue reflects the success of our subscription first strategy, which includes converting a portion of our maintenance space to our subscription products.
Speaker Change: Maintenance revenue was $112 million in the first quarter roughly flat compared to the prior year. Despite the conversion of a portion of these customers to our subscription products.
Speaker Change: Our maintenance renewal rate is at 97% on a trailing 12 month basis and was 98% for the first quarter.
Speaker Change: To remind you as we convert maintenance customers to subscriptions, we exclude those customers from our renewal rate calculation.
Bart Kalsu: As a result of the subscription revenue growth and strong maintenance renewal rates, we now have 93% of our total revenue as recurring revenue. For the first quarter, license revenue was $13 million, down 25% from $17 million in the prior year. As a reminder, our subscription-first focus has affected and will continue to affect our license sales performance.
Bart Kalsu: As a result of the subscription revenue growth and strong maintenance renewal rates. We now have 93% of our total revenue is recurring revenue.
Bart Kalsu: For the first quarter license revenue was $13 million down 25% from $17 million in the prior year.
Bart Kalsu: As a reminder, our subscription first focus has affected and will continue to affect our license sales performance.
Bart Kalsu: Our focus on operating discipline delivered another quarter of strong non-gap profitability. First quarter adjusted EBITDA was $92.1 million, growing 19% year over year. Representing an adjusted EBITDA margin of 48% and coming in $7.6 million above the high end of the $84.5 million outlook we gave for the quarter. In April, we paid a special dividend of $1 per share, or $168 million in accruals. We're proud of our work to deliver value back to our shareholders. We will continue to evaluate our capital allocation plan.
Bart Kalsu: Our focus on operating discipline delivered another quarter of strong non-GAAP profitability.
Bart Kalsu: First quarter, adjusted EBITDA was $92 1 million growing 19% year over year.
Bart Kalsu: Representing an adjusted EBITDA margin of 48% and coming in at $7 $6 million above the high end of the $84 $5 million outlook, we gave for the quarter.
Bart Kalsu: In April we paid a special dividend of $1 per share or $168 million in aggregate.
Bart Kalsu: We're proud of our work to deliver value back to our shareholders.
Bart Kalsu: We will continue to evaluate our capital allocation plans balancing financial flexibility with debt repayment opportunities, while evaluating opportunities to return capital to our shareholders and making selective strategic investments.
Bart Kalsu: Balancing financial flexibility with debt repayment opportunities while evaluating opportunities to return capital to our shareholders and making selective strategic investments. Turning to our balance sheet, our net leverage ratio at March 31st was approximately 2.7 times our trailing 12-month adjusted EBITDA. This compares to 2.9 times at the end of last quarter. And finally, adjusted for the dividend payment in April, our pro forma leverage ratio is at 3.2 times adjusted EBIT. In January of 2024, we refinanced our term loan, decreasing the interest rate by 50 basis points from SOFR plus 375 to SOFR plus 325, taking advantage of the interest rate environment at the time. We will continue to look for opportunities to reduce our variable interest rate as we go forward.
Bart Kalsu: Turning to our balance sheet, our net leverage ratio at March 31 was approximately two seven times, our trailing 12 months adjusted EBITDA. This compares to two nine times at the end of last quarter and.
Bart Kalsu: And finally adjusted for the dividend payment in April our pro forma leverage ratio is at three two times adjusted EBITDA.
Bart Kalsu: In January of 2024, we refinanced our term loan decreasing the interest rate by 50 basis points from silver plus $3 75 to <unk> plus 325, taking advantage of the interest rate environment at the time.
Bart Kalsu: We will continue to look for opportunities to reduce our variable interest rate as we go forward.
Bart Kalsu: We continue to generate strong cash flow with $36.3 million in cash flow from operations in the first quarter. Our cash and cash equivalents, and short-term investments balance was $312.8 million at quarter end. Our non-GAAP diluted earnings per share was $0.29 per share, well over the guidance range of $0.20 to $0.22 per share. Most of this beat is driven by our improved profitability, as well as a one-time income tax benefit. I will now walk you through our outlook before turning it over to Sudhakar for his final thoughts.
Bart Kalsu: We continue to generate strong cash flow with $36 $3 million in cash flow from operations in the first quarter, our cash and cash equivalents and short term investments balance was $312 8 million at quarter end.
Bart Kalsu: Our non-GAAP diluted earnings per share was 29 per share well over the guidance range of 20 to 22 per share. Most of this beat is driven by our improved profitability as well as a one time income tax benefit.
Bart Kalsu: I will now walk you through our outlook before turning it over to Sudhakar for his final thoughts.
Bart Kalsu: I will start with our second quarter guidance and then discuss our updated outlook for the full year. For the second quarter, we expect total revenue to be in the range of $186 to $191 million, representing 2% growth at the mid-period. Adjusted EBITDA for the second quarter is expected to be approximately $85 to $88 million, representing 9% growth at the mid-term. Non-GAAP fully diluted earnings per share are projected to be $0.21 to $0.23 per share, assuming an estimated 171.6 million fully diluted shares outstanding.
Sudhakar Ramakrishna: I'll start with our second quarter guidance, and then discuss our updated outlook for the full year.
Bart Kalsu: For the second quarter, we expect total revenue to be in the range of $186 million to $191 million.
Bart Kalsu: Representing 2% growth at the midpoint.
Bart Kalsu: Adjusted EBITDA for the second quarter is expected to be approximately 85% to $88 million.
Bart Kalsu: Representing 9% growth at the midpoint.
Bart Kalsu: non-GAAP fully diluted earnings per share are projected to be 21% to 23 per share assuming an estimated $171 6 million fully diluted shares outstanding.
Bart Kalsu: Finally, our outlook for the second quarter assumes a non-GAAP tax rate of 26% and.
Bart Kalsu: And we expect to pay approximately $33 million in cash taxes during the second quarter of which $21 million is related to the toll tax.
Bart Kalsu: Finally, our outlook for the second quarter assumes a non-GAAP tax rate of 26 percent, and we expect to pay approximately $33 million in cash taxes during the second quarter, of which $21 million is related to total taxes. For the full year, we expect total revenue to be in the range of $771 to $786 million, representing 3% year-over-year growth at the midpoint, leaving it unchanged from our prior guide. We are raising our adjusted EBITDA for the full year, which is now expected to be approximately $360 to $370 million, representing 11% year-over-year growth at the midpoint.
Bart Kalsu: For the full year, we expect total revenue to be in the range of 771% to $786 million.
Bart Kalsu: Representing 3% year over year growth at the midpoint.
Bart Kalsu: Leaving it unchanged from our prior guide.
Bart Kalsu: We are raising our adjusted EBITDA for the full year, which is now expected to be approximately $360 million to $370 million, representing 11% year over year growth at the midpoint.
Bart Kalsu: Non-GAAP fully diluted earnings per share are projected to be $1 to $1.04 per share, assuming an estimated 173.4 million fully diluted shares outstanding. Our full year and second quarter guidance assumes a euro to dollar exchange rate of 105 to 1. With that, I'll return the call to Sudhakar for his closing remarks.
Bart Kalsu: non-GAAP fully diluted earnings per share are projected to be $1 to $1 four per share assuming an estimated $173 4 million fully diluted shares outstanding.
Sudhakar Ramakrishna: Our full year and second quarter guidance assumes a euro to dollar exchange rate of 105 to one with that I'll return the call to <unk> for his closing remarks.
Sudhakar Ramakrishna: Thank you, Bart. We continue to be very proud of the continuation of top-line growth and adjusted EBITDA growth, both of which are a direct result of our transformation efforts and are indicative of the increasing relevance of our broad array of solution offerings, combined with our ability to innovate and to execute. As you've heard from Bart, with continued execution discipline, we raised our full-year adjusted EBITDA outlook. Customer environments continue to become more complex as they address the challenges and opportunities of their respective businesses. Equally, their budgets remain constrained, especially in this macro environment.
Sudhakar Ramakrishna: Thank you, but we continue to be very proud of the continuation of topline growth and adjusted EBITDA growth both of which are a direct result of our transformation efforts and are indicated of the increasing relevance of our broad area of solution offerings.
Sudhakar Ramakrishna: Bind with that ability to innovate and to execute.
Sudhakar Ramakrishna: You have heard from Buck with continued execution discipline, we raised our full year adjusted EBITDA outlook.
Sudhakar Ramakrishna: Customer environments continue to become more complex as they address the challenges and opportunities of their respective businesses equally.
Sudhakar Ramakrishna: Equally their budgets remain constrained, especially in this macro environment.
Sudhakar Ramakrishna: Customers are looking to consolidate tools and improve security, all while seeking solutions that are cloud ready, cost-effective, and can enhance their productivity. However, with customers in various stages of their cloud evolution, hybrid visibility is an unsolved challenge. We believe we are ideally suited to address these customer requirements. Finally, we believe that our focus on the SolarWinds platform gives significant operating efficiency and enhances our ability to cost-effectively innovate and help customers manage their hybrid and multi-cloud environments.
Sudhakar Ramakrishna: Customers are looking to consolidate tools and to improve security all while seeking solutions that are cloud ready cost effective and can enhance their productivity.
Sudhakar Ramakrishna: With customers in various stages of their cloud evolution hybrid visibility is an unsolved challenge.
Sudhakar Ramakrishna: We believe we are ideally suited to address these customer requirements.
Sudhakar Ramakrishna: Finally, we believe that our focus on the solar Inc. Platform gives us significant operating efficiency and enhances our ability to cost effectively innovate and help customers manage their hybrid and multi cloud environments.
Sudhakar Ramakrishna: The strong adoption of our hybrid cloud observability solutions that we launched just two years ago is a testament to our strategy and execution ability. Our self-hosted and SaaS solutions represent a continuum for our customers, allowing them to extend their data centers to public clouds at the pace their business needs dictate. We believe these distinct capabilities, combined with our execution discipline, set us up for continued profitable growth. Although many unknowns about the macroeconomic environment persist, we remain focused on the things that we can control, and I'm confident, as ever, in the direction of our business. I could not be prouder of our team's commitment to customer success. Again, I thank our employees, partners, customers, and shareholders for their commitment to SolarWinds. Bart and I are now happy to address your questions.
Sudhakar Ramakrishna: The strong adoption of our hybrid cloud availability solution that we launched just two years ago is a testament to our strategy and execution abilities.
Sudhakar Ramakrishna: Ah self hosted and SaaS solutions represent a continuum for our customers.
Sudhakar Ramakrishna: Having them to extend their data centers to public cloud at the pace their business needs dictate.
Sudhakar Ramakrishna: We believe these distinct capabilities combined with that execution discipline sets us up for continued profitable growth.
Sudhakar Ramakrishna: Although many unknowns around the macroeconomic environment persist we remain focused on the things that we can control and I'm confident as ever in the direction of our business.
Sudhakar Ramakrishna: I could not be prouder of our team's commitment to customer success.
Speaker Change: Again, I think that employees partners customers and shareholders with a commitment to Sullivan.
Speaker Change: <unk> and I are now happy to address your questions.
Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. And if you are called upon to ask your question and listening via the loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, please press star 1 to join the Q&A. And your first question comes from the line of Matt Hedberg of RBC Capital Markets. Please go ahead.
Speaker Change: Thank you we will now begin the question and answer session. If you have dialed in and would like to ask a question. Please press star one on your telephone keypad your hand and join the queue. If you would.
Matthew George Hedberg: Would like to withdraw your question simply press Star one again and if you are called upon to ask your questions and listening via loud speaker on your device. Please speak up your handsets and ensuring that your phone is not on mute when asking your question again.
Operator: Again, Please press star one to join the queue.
Operator: And your first question comes from the line of Matt Hedberg of RBC capital markets. Please go ahead.
Matthew George Hedberg: Thank you very much. Good morning, everybody.
Matthew George Hedberg: Thank you very much good morning, everybody.
Matthew George Hedberg: Maybe the first question for Sudhakar, you guys reported a good quarter relative to certainly your guide and expectations and I know, you're just kind of said the macro environment remains a bit uneven I guess im wondering just from a high level kind of given your results versus your guide can you talk a little bit more about how the selling environment feels versus 90 deals is it kind of similar and.
Matthew George Hedberg: The upside to estimate is really just due to kind of the execution of the company.
Sudhakar Ramakrishna: Maybe the first question for Sudhakar, you guys reported a good quarter relative to your guide and expectations, and I know you just kind of said the macro environment remains a bit uneven. I guess I'm wondering just from a high level, kind of given your results versus your guide, can you talk a little bit more about how the selling environment feels versus 90 Degrees? Is it kind of similar, and really the upside to estimates is really just due to kind of the execution of the company?
Matthew George Hedberg: Good morning, Matt first of all thanks for.
Sudhakar Ramakrishna: Continuing to support us and for your question in terms of the selling environment. We don't really see much of a difference, let's say in Q1 related to Q4 broadly speaking the last few quarters.
Sudhakar Ramakrishna: Good morning, Matt. First of all, thanks for continuing to support us and for your question. In terms of the selling environment, we don't really see much of a difference, let's say, in Q1 related to Q4, broadly speaking, the last few quarters. The value proposition that we have continues to resonate very well with our customers, and especially in this environment. So as we have guided for the future, we're taking into account numerous factors, and largely macroeconomic factors, and are continuing to focus on what we can control at one level and execute as hard as we possibly can. But there are no buying behaviors or selling patterns.
Sudhakar Ramakrishna: The value proposition that we have continues to resonate very well with our customers and especially in this environment. So as we have guided for the future. We're taking into account numerous factors and largely the macroeconomic factors and are continuing to focus on what we can control at one level.
Sudhakar Ramakrishna: And execute as hard as we possibly can.
Sudhakar Ramakrishna: But theres no got it.
Sudhakar Ramakrishna: Buying behaviors are selling patents.
Sudhakar Ramakrishna: That's good execution. Okay, that's helpful.
Sudhakar Ramakrishna: Just just good execution, Okay. That's helpful and then.
Sudhakar Ramakrishna: The success you've had in a lot of success with an observer ability and it's really good to hear.
Sudhakar Ramakrishna: The $100 million.
Speaker Change: Target here.
Sudhakar Ramakrishna: And then, you know, the success you've had, you've had a lot of success within Observability, and it's really good to hear, you know, the $100 million target here. I'm kind of curious, as Gen AI continues to resonate within your customers, are you seeing any sort of increased interest in your Observability solutions vis-a-vis Gen AI adoption within your customer base? Or is it too difficult to tell if that's, you know, maybe starting to positively influence, you know, your observability solutions?
Sudhakar Ramakrishna: Kind of curious.
Sudhakar Ramakrishna: <unk> Gen AI continues to resonate within your customers are you seeing any.
Sudhakar Ramakrishna: Increased interest in Europe, <unk> ability solutions vis vis <unk> <unk>.
Sudhakar Ramakrishna: Jenny I adopt.
Sudhakar Ramakrishna: Adoption within your customer base or is it too difficult to tell if thats <unk>.
Sudhakar Ramakrishna: Have you started to positively influence.
Sudhakar Ramakrishna: The observer ability solutions.
Sudhakar Ramakrishna: Matt, it's still too early to say that there is a strong pattern, but we are enjoying, call it early success and traction because we have been investing in AI for the better part of three years now. Most of the work or most of the benefits that customers derive have to do more with, call it predictive analytics or alert fatigue reduction or alert stacking, I should say.
Sudhakar Ramakrishna: Matt It's still too early to say that there is a strong pattern, but we are enjoying call. It early success and traction because we started investing in AI for the better part of three years now or we have been investing I should say.
Sudhakar Ramakrishna: Most of the book or most of the benefits that customers that I've had to do more with called predictive analytics or alert fatigue reductions alert stacking I should say and then more critically on the service management platform in terms of improving the efficiency of digital assistance and response times.
Sudhakar Ramakrishna: And then more critically on the service management platform in terms of improving the efficiency of digital assistance and response times. So, these are all consistent with a broader value proposition of time to value improvements, time to detect issue improvements, and remediation improvements. As it relates to Gen-AI in terms of asking, call it, English language questions that are an observability platform on optimizations, performance, etc., we have the ability and the capabilities to implement those things as the SolarWinds platform progresses, but that's not like an immediate capability or need that the industry is looking for.
Sudhakar Ramakrishna: So these are all consistent with our broader value proposition of time to value improvements time too.
Sudhakar Ramakrishna: Tech issue improvements and remediation improvements.
Sudhakar Ramakrishna: As it relates to Gen AI in terms of asking call. It English language questions that an observer ability platform on optimizations performance et cetera.
Sudhakar Ramakrishna: Have the <unk>.
Sudhakar Ramakrishna: The ability and the capability to implement those things as the Sullivan's platform progresses, but that's not like a immediate capability on need.
Sudhakar Ramakrishna: Industry is looking for.
Sudhakar Ramakrishna: Got it. Thanks a lot, guys.
Speaker Change: Got it thanks, a lot guys.
Sanjit Kumar Singh: Your next question comes from the line of Sanjit Singh from Morgan Stanley. Please go ahead.
Sanjit Kumar Singh: Your next question comes from the line of <unk> Singh from Morgan Stanley. Please go ahead.
Sanjit Kumar Singh: Good morning, and thank you for taking the question. I want to talk a little bit about the subscription ARR, which Excel recorded as 36%. I was wondering to what extent this should contribute to back growth. Is there any way to sort of decompose the growth between sort of expansion from the existing customer base versus migrations?
Sanjit Kumar Singh: Good morning, and thank you for <unk> I want to talk a little bit about the subscription <unk>, which is our quarter, that's 36%, but I was wondering to what extensions contribute to that growth is there any way to sort of decompose the growth between sort of.
Sanjit Kumar Singh: Expansion from the existing customer base versus migrations.
Bart Kalsu: Yeah, thanks for the question. You know, our subscription ARR growth is really primarily driven from, you know, the efforts that we have around our subscription first strategy, like we talked about. And a big effort in that is converting our existing customers over to the hybrid cloud observability product. And we continue to do that. That continues to lead the growth in subscription ARR, and we're still doing that at a healthy uplift.
Speaker Change: Yes, thanks for the question.
Bart Kalsu: Our subscription and all of our growth is really it's primarily driven from the efforts that we have around our subscription first strategy like we talked about it.
Bart Kalsu: And a big effort on that is converting our existing customers over to the hybrid hybrid cloud absorbability product.
Bart Kalsu: And we continue to do that that's continues to lead the growth in the subscription IRR in and we're still doing that at a healthy uplift we're still converting customers at over one six times what their current relationship is so when we convert $1 maintenance, we're converting that over to close to a $1 60, a subscription revenue. So that's really what's driving the growth in.
Bart Kalsu: You know, we're still converting customers at over 1.6 times what their current relationship is. So when we convert a dollar of maintenance, we're converting that over to close to $1.60 of subscription revenue. So that's really what's driving the growth in subscription ARR.
Bart Kalsu: <unk>.
Sudhakar Ramakrishna: And then just more broadly, when I look at the growth of the company on a total revenue basis, I think you're guiding on next quarter 2%, four years to 3%, versus kind of your total recurring revenue growth, which has been sort of more like high single digits. Is there a scenario where the company sunsets new perpetual licenses and ultimately transitions customers fully to a subscription or a hybrid or a cloud service?
Speaker Change: Understood that's helpful.
Bart Kalsu: And then just more broadly when I.
Sudhakar Ramakrishna: Look at the.
Sudhakar Ramakrishna: The growth of the company on a total revenue basis, I think youre guiding next quarter or 2% to 3% versus kind of your total AUR growth, which has been sort of more like high single digits is there a scenario, where where the company sunsets, new perpetual licenses and ultimately.
Sudhakar Ramakrishna: Transitions customers fully to a subscription or a hybrid or a club.
unknown: Thank you all for joining us. Thank you. Thank you.
Sudhakar Ramakrishna: Hi.
Sudhakar Ramakrishna: I'll give a quick answer and then elaborate, Sanjit. Over time, then, it'll be yes, largely driven by the kind of focus that we have both on the product side, how we have packaged things, and how we are positioning this value to our customers. At the same time, we believe that this should not be a forced transition and should be based on a value proposition that we deliver to customers. You've heard me talk about the subscription transition, which for us is as much a value model transition as it is a business model transition.
Sudhakar Ramakrishna: Overtime.
Speaker Change: I'll give a quick answer and then elaborate.
Sudhakar Ramakrishna: Over time, then it will be yet.
Sudhakar Ramakrishna: Largely driven by kind of the focus that we have both on the product side, how we have package things and how we are positioning this value to our customers at.
Sudhakar Ramakrishna: At the same time, we believe that.
Sudhakar Ramakrishna: This should not be a forced transition and should be based on a value proposition that we deliver to customers and you've heard me talk about subscription transition for us is as much a value model transition as it is a business model transition, so we shouldnt be forcing it on customers but.
Sudhakar Ramakrishna: So we shouldn't be forcing it on customers. But eventually, do I see it given the trends in our subscription growth? I do. The functions that are driving it are increased consolidation around our SolarWinds platform, increased ability to both upsell and cross-sell to both existing customers as well as the expansion point that you just made. So we are tending in that direction anyway at this point.
Sudhakar Ramakrishna: Eventually do I see it given the trends in our subscription growth.
Sudhakar Ramakrishna: Do.
Sudhakar Ramakrishna: And the functions that are driving it is increased consolidation around Sullivan's platform increased ability to both the up and cross sell to both existing customers as well as the expansion point that you just made.
Sudhakar Ramakrishna: So we are tending in that direction anyway at this point.
Sudhakar Ramakrishna: Thank you so much for the thoughts and early congratulations on the $100 million observability milestone. It's great to see. Thanks. Thank you, Sanjit.
Speaker Change: Thank you so much for the thoughts on early congrats on the $100 million almost durability milestone that's great to see.
Sudhakar Ramakrishna: Thank you, Sanjit. That was a significant achievement for our team. It's only been two years since we introduced those solutions, and to achieve that run rate is really a testament to the value proposition and the focus of our team.
Speaker Change: And if that was a significant achievement for our team.
Sudhakar Ramakrishna: Only been two years since we introduced those solutions and to achieve that run rate is really a testament to the value proposition and the focus of heart teams.
Sudhakar Ramakrishna: Yes.
Pinjalim Bora: Your next question comes from the line of Pinjalim Bora of J.P. Morgan. Please go ahead.
Sudhakar Ramakrishna: Your next question comes from the line of Julien <unk> of Jpmorgan. Please go ahead.
Pinjalim Bora: Oh, great. Thank you for taking the questions. Congratulations on the quarter.
Pinjalim Bora: Oh, great. Thank you for taking my questions congrats on the quarter.
Pinjalim Bora: Wanted to stay on that line of work.
Speaker Change: <unk> was asking around.
Pinjalim Bora: On the migration.
Pinjalim Bora: When I look at the sequential on the <unk>.
Pinjalim Bora: Maintenance here it seems like it's a much bigger decline this.
Pinjalim Bora: Q1 sequentially I'm wondering if you have.
Sudhakar Ramakrishna: I want to stay in that line of what Sanjit was asking around the migration. It seems that when I look at the sequential on the maintenance era, it seems like it's a much bigger decline this Q1 sequentially. Put in place anything that is different going into this year on the go-to-market side that would drive more focus on that maintenance migration.
Pinjalim Bora: But.
Pinjalim Bora: Anything that is different going into this year.
Sudhakar Ramakrishna: On the go to market side.
Sudhakar Ramakrishna: Dave.
Sudhakar Ramakrishna: More focus on that maintenance migration.
Sudhakar Ramakrishna: On the maintenance migration to subscriptions, specifically to our observability solutions, our strategy has always been to start in North America and evolve that motion to EMEA and to APJ. What we have experienced, and you've heard me talk about the flywheel motion.
Sudhakar Ramakrishna: And then on the maintenance migration to subscription specifically to our availability.
Sudhakar Ramakrishna: Our strategy has always been start in North America, and evolve that motion to EMEA and two apd, what we have experienced in Europe.
Sudhakar Ramakrishna: Let me talk about the flywheel motion.
Sudhakar Ramakrishna: What we are experiencing now in Q1 is increased traction in EMEA that we had set up in 2023. And so the combined effect of that is what's driving more of our observability solution sales. And a meaningful part of that is through maintenance-based conversion. So if you see a decline in maintenance pace, that's not a bad thing given the healthy conversion factor that we are experiencing in the observability gain.
Sudhakar Ramakrishna: What we're experiencing now in Q1 is a increased traction in EMEA that we had set up in 2023 and so the combined effect of that is what's driving more of our observed but at these solution sales and a meaningful part of that is through maintenance based conversion.
Sudhakar Ramakrishna: So if you see a decline in maintenance.
Sudhakar Ramakrishna: Base, that's not a bad thing given the healthy conversion factor that we're experiencing in the availability gains.
Pinjalim Bora: Yeah, that's, that's clear. But I'm also trying to understand your subscription error is obviously fantastic. But your total error in sequential additions is basically flat. But you're saying you're getting about 1.6 times this kind of conversion. So, if I assume that the entire 6 million, 7 million decline in maintenance is going to your subscription ERR, I don't, apart from migration is down a bit. Is that fair, or is it not? Not thinking about it. I think if you're thinking about it.
Sudhakar Ramakrishna: Yes.
Speaker Change: That's clear.
Pinjalim Bora: Right.
Pinjalim Bora: Also trying to understand your subscription there is obviously fantastic.
Pinjalim Bora: But your total IRR is sequential additions is basically flat.
Pinjalim Bora: But youre, saying youre getting about one six times kind of a conversion rate.
Pinjalim Bora: So if.
Pinjalim Bora: If I assume entire 6 million $7 million decline in maintenance is going to your subscription IRR.
Pinjalim Bora: That doesn't mean, including the maintenance the uplift that you have that would meet the spin.
Pinjalim Bora: No.
Pinjalim Bora: Apart from migration is down a bit yes.
Pinjalim Bora: Yes.
Pinjalim Bora: Is that fair or am I just.
Speaker Change: Thank you.
Bart Kalsu: I think if you're thinking about new logo ads for the license and maintenance base, yes, that would be down, but that's because of our focus on efforts to get new customers to adopt one of our subscription products. And so that's the focus as it relates now, Pinjalim, to what we're doing on the license and maintenance side.
Pinjalim Bora: If youre thinking about new logo adds to the license and maintenance base, yes that would be down, but thats because of our focus on efforts on getting new customers to adopt one of our subscription products.
Bart Kalsu: So that's the focus as it as it relates now pendulum to what we're doing on the license and maintenance side.
Bart Kalsu: So.
Pinjalim Bora: Okay, I understand. Thank you.
Pinjalim Bora: Okay understood. Thank you.
Operator: We can follow up with them during our one on one as well.
Speaker Change: We can we can follow up with.
Operator: During our one on one as well as pendulum.
Speaker Change: Sounds good thank you.
Miller Jump: Your next question comes from the line of Miller Jump of Truist Security. Please go ahead.
Operator: Your next question comes from the line of John Chu with <unk> Securities.
Miller Jump: Please go ahead.
Sudhakar Ramakrishna: Great. Thank you for taking the questions and congratulations on the solid results. Um, I think maybe just one more question on kind of the demand backdrop. Hyperscalers are reporting an acceleration in cloud revenue right now. So I guess just, should we think about hyperscaler growth as a potential leading indicator for your cloud growth? Like, as they call for re-acceleration with the increased contributions from Gen AI and other projects, like, is that a tailwind for you all? Or is that a lower correlation given the
Miller Jump: Great. Thank you for taking the questions and congrats on the solid results.
Sudhakar Ramakrishna: I think maybe just one more question on kind of the demand backdrop Hyperscale is our reporting an acceleration in cloud revenue right. Now so I guess should we think about hyperscale or growth as a potential leading indicator for your cloud growth.
Sudhakar Ramakrishna: As they call for a re acceleration with the increased contributions from <unk> and other projects like is that a tailwind for you all or is that a lower correlation given the subscription transition.
Sudhakar Ramakrishna: Right now, most of their reporting is on the infrastructure build-out side of the house and then the consumption of that infrastructure. Will that be a tailwind for us? I'd say the short answer is yes, but is that a significant part of our business at this point in time? And do we have to depend on that tailwind to succeed? I'd say no.
Sudhakar Ramakrishna: Right now most of their reporting is on the infrastructure build out side of the house and then that consumption of that infrastructure.
Sudhakar Ramakrishna: Will that be a tailwind for us I would say short answer is yes, but is that a significant part of our business at this point in time and do we have to depend on that tailwind to succeed I'd say no.
Bart Kalsu: Okay, that's helpful. Thanks. And then maybe just a quick question on the guide, you know, strong revenue performance in the quarter, but reiterating the guide for the year, does that indicate that some of the outperformance was from deals getting pulled and from other quarters, or is there something, you know, to maybe a more cautious outlook for the remainder of the year? And not really. We've had
Speaker Change: Okay. That's helpful. Thanks, and then maybe just.
Bart Kalsu: Quick question on the guide.
Bart Kalsu: Strong revenue performance in the quarter.
Bart Kalsu: But reiterating the guide for the year does that indicate that some of the outperformance was from deals getting pulled in.
Bart Kalsu: From other quarters or is there something to maybe a more cautious outlook for the remainder of the year.
Bart Kalsu: And not really, we've had a very balanced quarter in Q1. The guide on the top line, specifically, as you know, we increased the EBITDA guide for the entire year due to continued execution by our teams. The revenue guidance at this point is more a factor of looking at all outside factors, including macro, and being conservative about how to model it. So as the year progresses, we'll continue to provide you better guidance on that, too. Thank you very much.
Bart Kalsu: Not really I, we've had a very balanced quarter in Q1 and.
Bart Kalsu: The guide on the top line, specifically as you know increase the EBITDA guide for the entire year.
Bart Kalsu: Due to continued execution by our teams.
Bart Kalsu: Revenue guidance at this point, it's more a factor of looking at all outside factors, including macro and being conservative about how to model. It. So as the year progresses, we'll continue to provide you a better guidance on that too.
Speaker Change: Understood. Thank you.
Operator: Again, if you would like to ask a question, please press star 1 on your telephone keypad. There are no further questions at this time. I will now turn the conference back over to Sudhakar Ramakrishna. Please go ahead.
Bart Kalsu: Again, if you would like to ask a question. Please press star one on your telephone keypad.
Operator: There are no further questions at this time I will now turn the conference back over to Sudhakar Ramakrishna. Please go ahead Greg.
Sudhakar Ramakrishna: Thank you again for attending our call and thank you for your continued support of SolarWinds. I'll talk to you soon.
Sudhakar Ramakrishna: Thank you again for attending our call and thank you for your continued support of Sullivan.
Sudhakar Ramakrishna: Talk to you soon.
Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining us. You may now disconnect.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Operator: Please wait; the conference will begin shortly.
Speaker Change: Please wait the conference will begin shortly.
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