Q2 2019 Earnings Call

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They have a spelling of your first and last name. Please.

Jason Hormann HR Mam.

And your company name.

A I E R.

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Im zero eight it for three territories or six.

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Changes in individual balance sheet, an interest even ounces not possible without unreasonable effort.

And releases as reconciliations would imply an inappropriate degree of precision.

Lets otherwise indicated references to profitability comparable measures refer to such measures on a non-GAAP basis with that ill now turn the call over to Kevin.

Hey, Dave and thanks, everyone for joining us for today's call.

Im very pleased with our second quarter 2019 results. They included accelerated top and bottom line growth, which resulted in total non-GAAP revenue and adjusted EBITDA were both well above our outlook for the quarter.

Second quarter, non-GAAP revenue totaled $231 million, reflecting year over year growth on a constant currency basis of 15%.

Adjusted EBITDA also exceeded the high end of our outlook range for the second quarter coming in at $111 million, reflecting year over year growth of 18% and an adjusted EBITDA margin of 40.1% of the majority of our revenue outperformance in the quarter flow straight to the bottom line. Despite the dilutive impact of the manage acquisition, which closed during the second quarter.

As we discussed on our first quarter earnings call in April . The addition of the manage extend our hybrid IP management capabilities to the Iraqi service management market, allowing us to enhance our ability to serve the needs of the technology pro from the point of the identification of an issue through to the resolution of the issue we plan to attack. The I can say market with the same disruptive solutions approach you have seen us employ in the network and systems management market, which includes 80 deployed to the to deploy to try and use product in a disruptive approach to pricing.

Lets him and his team has had a great attitude throughout the entire acquisition process.

And their excitement about becoming part of the soul and family and commitment to making this acquisition successful has made the initial integration process is going very well.

We're excited about the new Avenue of subscription revenue growth. This creates for us in the Houston market.

We have moved through the first six months of 2019 with solid momentum that reflects the work we've done over the last three years to position ourselves as the hybrid IP management provider choice organizations, who need a comprehensive set of products to manage their infrastructure and applications without regard to where those IP assets and on premise or in the cloud and without regard to where those assets need to be managed from.

As we look across our business, we feel good about the opportunity we see for sustainable highly profitable long term growth in each of our product lines.

Driven by the power of our go to market model, which has historically resulted in low customer acquisition costs.

In fact, even the subscription revenues have increased dramatically as a percentage of total revenue over the last three years. We've seen these costs as a percentage of revenue from new bookings remain remarkably consistent.

In addition on unique component of our operating approach is our global product development model, which has allowed us to deliver high quality products with frequent product releases at a low cost as a percentage of revenue.

During the second quarter, we increased the pace of our revenue growth consistent with the outlook, we provided at the beginning of the year.

We have been able to drive acceleration in both our license and maintenance revenue and subscription revenue streams, which resulted from solid sales and marketing execution across our product lines and our approach to product strategy that has resonated with our customers.

Our subscription businesses performed well during the second quarter, delivering approximately $81 million in non-GAAP revenue and growth of 26% on a constant currency basis with non-GAAP subscription revenue increasing to 35% of total non-GAAP revenue for the quarter.

Even when excluding the contribution from the manage acquisition growth in non-GAAP subscription revenue accelerated significantly compared to the first quarter led by strong core growth from our legacy business.

Subsequent to the closing of the acquisitions manage also performed well in the quarter. This performance resulted from the combination of strong traction that this managed service platform have been seeing in the market prior to the acquisition.

Combined with the power of the someone's brand and our initial work to accelerate demand generation and brand awareness recipe, which we relaunched as solo and service desk in late June .

We remain confident in the outlook, we provided on our first quarter earnings call for the revenue and adjusted EBITDA contribution from some managed for 2019 as well as the long term growth and profitability outlook, which we also provided.

We also had a strong quarter performance from our on premise business as our portfolio of network and system management products saw combined constant currency license and maintenance revenue growth of 10% in the second quarter.

Including the highest rate of constant currency maintenance revenue growth, we delivered in the past five quarters and 12%.

We believe the acceleration in license and maintenance revenue growth that we drove in the second quarter reflects the focus we have on ensuring that we are providing technology approach with the solutions they need to solve the high Tech management problems that they are facing today.

And we remain committed to providing the solution to them the way they want them delivered and price points that are compelling.

We also believe that we have assembled the most comprehensive product portfolio and IP management to meet the needs of the individual technology Pro. In addition, we have continued to invest in our products, we solve problems and environments control directly by.

Including on premise behind corporate firewall and in private and hosted data centers.

It is this approach, which has allowed us to grow at a pace faster than the overall growth of this part of the team management Mark.

The market position, we have created combined with our unique and powerful go to market model has enabled us to consistently at a large volume of new customers and has averaged nearly 7000, new customers per quarter over the last four quarters.

We have added this large volume of new customers, while at the same time retaining existing customers at an industry leading rate.

And expanding our financial relationships with our customers over time.

In fact during the second quarter of 2019, we grew the number of customers with $100000 or more a trailing 12 month spend with US 200 to 780 from 761 at the end of the first quarter.

We believe this reflects the strength of our products, we simply work and the viral nature of our land and expand on model is almost all these large relationships started with a small initial purchase.

As we look ahead based on our strong on premise product portfolio.

And work, we have done to make this product portfolio relevant in hybrid infrastructure environments.

The relationships, we have with our customers.

And our disrupt the go to market approach enterprise software. We believe we can continue to take market share from legacy IP management vendors as a result, we expect our license and maintenance revenue to grow faster than the growth rate for the on premise IP management markets.

With that I will now turn the call over to Mark for a more detailed discussion of our Q2 results and a view of our outlook for the second half of 2019.

Thanks, Kevin and thanks, again to everyone joining us on today's call before I begin my remarks, I want to provide a little context first our GAAP results for the second quarter are presented in detail in our second quarter press release.

I also want to provide a quick reminder, that we will discuss the second quarter financial information on this call on a non-GAAP basis and that we are presenting results as calculated under eight centssix, which aligns with the second quarter outlook, we provided in April .

The adjustments to revenue in the second quarter of 2019 required by AMC six ACICS netted to a $2000 difference as compared to 86 silver five while expenses were 1.2 million lower under AMC six so six driven by the capitalization and associated amortization of sales commissions.

As Kevin indicated in his comments the second quarter was another quarter of solid execution.

We exceeded the high end of our outlook for the quarter for total license and maintenance revenue as well as subscription revenue. The high end of our previous outlook for total revenue was $229 million and we finished the second quarter with total revenue of $230.6 million, which reflects year over year growth.

Of 14%.

However, we continue to battle foreign currency headwinds in the second quarter and total revenue year over year growth on a constant currency basis was 15%.

non-GAAP recurring revenue was 83% of total non-GAAP revenue for the second quarter and continues to increase as a percentage of our total revenue, which is consistent with what we talked about last year. During our initial public offering and we expect that trend to continue and looking ahead.

Okay I will now walk you through the financial details of our second quarter results. I will then provide you with our outlook for the third quarter and full year before turning it back over to Kevin for some final thoughts.

Second quarter revenue growth was led by non-GAAP subscription revenue of $80.6 million, which grew 23% year over year on a reported basis and 26% on a constant currency basis.

This growth was led by our MSP product line.

A solid contribution from our cloud based application management products as well as the contribution from this manage acquisition that closed during the second quarter.

We have continued to add products that expand our subscription revenue stream and expect subscription revenue to continue to lead our revenue growth for the second half of 2009.

Our success in landing expanding and retaining customers translated into a solid increase in monthly recurring revenue in the second quarter of 2090, driven primarily by our MSP business.

Our average subscription net retention rate remained consistent at 105% for the trailing 12 months.

We believe that our continued focus on high quality, new customer growth in our MSP business combined with price increases from the first half of 2019 strong net retention rates and the growth from the hit and product line will result in an acceleration in subscription revenue growth in the second half of 2019.

Total non-GAAP license and maintenance revenue was $150 million, which was an increase of 9% year over year on a reported basis and an increase of 10% on a constant currency basis.

For the second quarter non-GAAP maintenance revenue was $110.8 million, which was an increase of 11% year over year on a reported basis and an increase of 12% on a constant currency basis.

Our strong maintenance revenue growth reflects the benefits of our unique maintenance model as it drives a higher proportion of recurring maintenance revenue for each dollar of license been as compared to traditional license and maintenance model.

Our maintenance growth also reflects the tailwinds associated with six straight quarters of license revenue growth.

However, we believe the primary driver of our maintenance growth is the loyalty of our customer base and their satisfaction with our products that as reflected by our high maintenance renewal rates, which were 96% on a trailing 12 month basis through the end of the second quarter.

We also had a very strong quarter of non-GAAP profitability in the second quarter of 2019 second quarter. Adjusted EBITDA was $110.9 billion, representing an adjusted EBITDA margin of over 48% and a strong quarter of growth as adjusted EBITDA increased by 18% year over year.

Well ahead of second quarter total revenue growth.

We believe our ability to drive such high adjusted EBITDA in a quarter, where we completed a dilutive acquisition is a great proof point as the leverage and efficiencies we have built into our operating model and the ability and the ability we have to drive sustainable long term earnings growth.

non-GAAP expenses were approximately $124.2 million in the second quarter of 2019, which includes $18.9 million of non-GAAP cost of revenue and $105.3 million in non-GAAP operating expenses, which reflects and an 11% increase year over year.

Keep in mind that 2019 sales and marketing expenses reflect the adoption of AMC six so six and would have been 1.2 million higher on a six or five pieces.

All of our non-GAAP expenses grew at a rate at a rate slower than our reported revenue growth for the quarter.

That includes our sales and marketing expenses, which were up 11% year over year.

Sales and marketing expense as a percentage of total revenue was down year over year as a percentage of total revenue to 26.8% versus 27.5% in the second quarter of 2018, despite the dilutive impact business to manage acquisition.

We have maintained a very consistent level of sales and marketing spend as a percentage of revenue over the last three years. However over the same timeframe. We have built a very large subscription revenue stream.

Which has increased from 22% of total revenue to 35% of total revenue and we have consistently added a very high volume new customers each quarter across all our product lines.

We believe our ability to wholesales and marketing spend at a consistent level relative to revenue will doing those two things illustrates the power of the solutions approach and the efficiencies built into our go to market model, which allow us to drive a very high volume of new customers in the door each quarter at a very low cost without regard to whether they are buying a license or a subscription.

We also have maintained non-GAAP gross margin of approximately 92% for more than three years as subscription revenue has increased meaningfully as a percentage of total revenue.

Which is a feat that very few companies have been able to accomplish this further illustrates our point of view that having a large and growing subscription revenue stream does not mean, you can also run a highly profitable business.

And finally, we ended the quarter with $155 million of $55 million of cash.

The decrease since the end of the first quarter is primarily due to the size of the acquisition of some managed in the second quarter, which we financed with cash off of our balance sheet.

Cash collections were strong in the second quarter and Dsos at June Thirtyth 2019 were at 38 days down from a slightly higher level at the end of March.

At June Thirtyth, our net leverage was at 4.2 times trailing 12 month adjusted EBITDA compared to 3.7 times at March 30 Onest.

Which is lower by almost half a turn compared to the post acquisition pro forma net leverage we discussed on our first quarter earnings call.

Our outlook for net leverage is for the ratio to be approximately 3.5 times by the end of 2019, assuming no additional acquisition activity.

I will now walk you through our updated outlook for the full year and our outlook for the third quarter of 2019 before turning it over to Kevin for some final thoughts.

Please note that the revenue adjusted EBITDA and EPS outlook, we are providing today will be based on the C. Six of six.

We will continue to also provide our quoted results under six so five in our earnings releases for the remainder of 2019 for comparison purposes to prior year.

However, we have shifted to providing our outlook on an assay six a six basis given our full adoption of six of six from a systems and processes perspective, and the acquisition of some manage as well as the immaterial difference in revenue between two theaters.

That said, we will make sure to describe how our outlook has been impacted by the move to AMC six of six where applicable.

Though to quickly make a point our total revenue outlook for the full year is effectively the same under six doses as it was under six at five.

Okay, well first what the walk you through our updated outlook for the full year.

Foreign currency exchange rates are a bit of a moving target. These days as a result, our updated outlook for the remainder of the year now assumes a euro to us the exchange rate of 1.11 versus our initial 2019 assumption of 1.14.

We're also assuming a pound to dollar exchange rate of 1.22, which is consistent with current trading ranges versus our initial 2019 assumption of 1.3.

The strengthening of the US dollar against these two key currencies is the root of most of our foreign currency headwinds so far in 2019.

Our assumptions further key for other key foreign currency exchange rates are also lower against the US dollar than they were in February of 2019 and lower than the assumptions, we use for our revenue forecast from our first quarter earnings call in April due to currency exchange rates for the those currencies.

Foreign currency fluctuations have a larger relative impact on our subscription revenue than our license and maintenance revenue as our MSP business has a larger percentage of its revenue outside the U.S compared to our license and maintenance that business.

Based on our strong results for the first half of 2019, we are updating and raising our 2019 revenue outlook for the full year. Despite the additional increase in foreign currency headwinds since we last provided a full year outlook on our first quarter earnings call.

The strengthening of the US dollar during the second quarter and through July has an incremental $3.5 million or negative impact on our outlook for the second half of the year, which raises the cumulative negative impact from foreign currency on our beginning of the full year revenue outlook to over $7 million in the face of these foreign currency headwinds we have raised the high end of our full year revenue outlook by $17 million since it since it was initially provided.

This increase includes an improvement in our outlet where organic growth of our license and maintenance and subscription product lines as well as the impact of the acquisition of the suit us to manage in the second quarter of 2009.

We now expect our full year 2019, non-GAAP total revenue to be in the range of 938 million to $950 million.

Representing growth of 12% to 14% over a total non-GAAP revenue in 2018.

Note that consistent with the outlook, we provided on our April earnings call. Our revenue outlook is on a non-GAAP basis and excludes the purchase accounting related reduction in some manages deferred revenue by required by GAAP.

Adjusting our full year 2019 outlet using the same foreign currency rates that we experienced in 2018 results in 2019 constant currency growth of 13% to 15%.

Total license and maintenance revenue is expected to be in the range of $611 million to $619 million.

Representing growth of 7% to 9% on an on a reported basis, which equates to 8% to 10% on a constant currency basis.

non-GAAP subscription revenue is expected to be approximately $327 million to $331 million representing growth of 23% to 24% on a reported basis and approximately 24% to 26% on a constant currency basis.

Through the end of the second quarter. We are meaningfully ahead of the pace necessary to deliver the range of profitability that we laid out at the beginning of the year as adjusted for this I manage acquisition as a result, we plan to take the opportunities to spend some incremental dollars on new growth initiatives over the back half of the year with the intent to deliver a level of profitability at the high end of the outlook range. We previously provided.

With that being said adjusted EBITDA is expected to be in the range of $450 million to $453 million.

Representing and an estimated adjusted EBITDA margin of approximately 48%.

non-GAAP fully diluted earnings per share is expected to be in the range of 81 to 82 cents per share assuming an estimated 311.7 million diluted shares outstanding for 2019, our full year 2019, EPS outlook reflects an assumed a 21% non-GAAP tax rate.

Now turning to our outlook for the third quarter of 2019.

For the third quarter of 2019, we expect total non-GAAP revenue to be in the range of $241.5 million to $246 million.

Representing year over year growth of 13% to 15% on a reported basis and 14% to 16% growth on a constant currency basis.

Total license and maintenance revenue for the third quarter is expected to be in the range of $157 million to $159.5 million.

Representing growth of 7% to 9% on a reported basis and 9% to 10% on a constant currency basis.

Subscription revenue is expected to remain to be in the range of $84.5 million to $86.5 million representing growth of 25% to 27% on a reported basis and 25%, 28% on a constant currency basis.

Adjusted EBITDA is expected to be in the range of $112 million to $113.5 million for the third quarter.

Representing an adjusted EBITDA margin of approximately 46%.

This lower margin percentage in the third quarter compared to the second quarter is due to the dilutive impact for this to manage acquisition.

Which is consistent with diluted the dilutive impact we expected to manage to have in third quarter.

Excluding the impact of to manage we expect our adjusted EBITDA margins to be higher than those in the second quarter.

non-GAAP fully diluted earnings per share is expected to be between 19, and 20 cents per share assuming and an estimated 311.5 million diluted shares outstanding for the full quarter.

Our outlook for the third quarter quarter assumes a non-GAAP tax rate of 22% and we expect to pay approximately 8.5 million in cash taxes during the third quarter of 2019.

With that I'll now turn the call back over to Kevin.

Thanks, Bart as you can hear our comments, we feel positive about performance of the business over the first two quarters of 2019.

We believe that we are positioned to deliver a year of accelerating subscription revenue growth and license and maintenance revenue growth.

Our business has shown great operating leverage even as recurring revenue as a percentage of total revenue and simply subscription revenue as a percentage of total revenue have increased meaningfully.

These operating result fly in the face of the conventional wisdom that a recurring revenue business cannot be highly profitable.

As we have discussed previously since the take private transaction in 2016, we've been focused on increasing percentage of our total revenues is recurring.

As Bart stated in his comments. This focus has resulted in 83% of our total revenue being recurring in the first six months of 2019 as we look into the future does our expectation the recurring revenue will continue to grow at a faster pace than total revenue driven by our high growth cloud based subscription revenue product and the consistent growth of our maintenance revenues.

I am pleased that over the course of the last two quarters, we have been able to raise our revenue outlook for 2000 $19 million to $950 million at high end of our range.

Which reflects an increase of $17 million from the high end of the range. Our initial outlook for 2019, which we provided on our third quarter 2018 earnings call.

As far as indicated in his comments as increases despite over $7 million and unexpected foreign currency headwinds, let's we provided that original full year outlook for 2019.

The increase in our outlook when adjusted for the negative impact of these foreign currency headwind is over $24 million, which is comprised of a constant currency increase in our organic growth approximately $12 million, an increase of approximately $12 million related to the estimated acquisition.

The increase in our organic growth outlook reflects the success that we've had in improving our license and maintenance revenue growth rate, while accelerating our subscription revenue cohort growth rate as we moved through the first half of 2019.

Consistent with our outlook, we are seeing the momentum of our business accelerate sequentially in the second quarter. We expect this momentum to continue as we move to remain the remainder of 2019.

We expect to see celebration to be reflected in our revenue growth in cash flow over the second half of the year.

As we indicated our first quarter earnings call. We have been focused on expanding the number of solutions, we provide to our end of MSP customer to enable them to address a broad set of challenges they face as they manage the environment for the hundreds of thousands of small and midsized business customers, which they serve.

During the second quarter, we launched several new products into our MSP customer base.

This included a new security offering which allowed during this phase to move beyond just providing enterovirus to their customers providing protection against a broad range of attacks that all companies are facing in today's threat lighting infrastructure World and we recently launched a settlement of past portal suite of products, which includes a set of password management offerings and 90 documentation product for the MLP market.

We have seen a high level initial interest in each of these new products from our customers and expect to see strong penetration of our MSP customer base with these products over the remainder of 2019 and through 2020.

As we enter the second half of 2019, we are focused on several key growth initiatives.

First we are committed to driving a high level of interest in our new like TSM offering among the settlement customer base.

We did an initial launch fulfillment service Decker SSD into our customer base in early may have already closed several transactions from that initial launch.

During the second half of 2019, we plan to make driving adoption of someone's SSD by our customers a high priority, we expect to learn a lot over the course of the next two quarters through this activity, which we believe will provide a roadmap for ideas and customer adoption as we move into 2020.

Second as I've just stated we added a number of new offerings to our MSP product portfolio during the second quarter.

These new products are positioned to be adopted by our existing MSP customers with the goal of driving improved cross sell resulting in higher net retention rates.

Driving this adoption will be a high priority for our MSP team over the second half of the year.

Third we have aligned our public cloud management product portfolio around an application management story and that is the primary issue that this portfolio of cloud based products addresses. This positioning has allowed us to begin to connect our on premise based products with our cloud based products much more tightly.

During the second quarter. We also began the work to launch our obligation management products into the international markets, which we have planned for the second half of 2019.

In addition, late in the second quarter, we stood up a small dedicated sales team focused on selling our obligation management products into our core IP customer base.

Now turning briefly to the environment project spending we are seeing in our business as we get a number of questions about this when we're meeting with investors.

The demand environment broadly management during the first half of 2019 is in solid.

We have seen incremental strength in North America, which include us federal and in Asia Pacific.

However, there has been some level of unevenness across the different regions in EMEA.

Based on current indications we track, we believe that the spending environment in the back half of 2019 will be similar to what we saw in the first half of 2019 across most of the world.

However, we do believe that the risk of additional uncertainty is increasing in EMEA, particularly in your in the UK due to the status of the Brexit negotiation.

So our confidence in our business has remained high based on our results for the first half of 2019 the acceleration in growth we saw in the second quarter. The indications of acceleration we're seeing in July .

Potential impact of new product, we have recent released and our expansion into the idea to market. We're also cognizant of these uncertainties in the global economic environment.

We have considered the potential impact of these uncertainties on our results for the service for the second half of 2019 and believe that we have properly taken them to into account in the outlook for the remainder of the year the barges providing.

The last topic I will briefly touch briefly touch on is our M&A strategy as we look forward through the remainder of 2019 and into July 2020, as I want to make sure. There is a clear understanding of our thoughts as it relates to potential future acquisition activity.

First we believe its strategic M&A is a core competency, which we have developed over the last 13 years.

We have shown the ability to acquire companies and products and quickly put them into our go to market engine driving growth at a high level of profitability.

As you have save our financial results. Our operating model is also historically allowed us to generate cash quickly and deleverage rapidly in fact, despite spending approximately $350 million on acquisition. During the first half 2019, our net leverage ratio at June 30 is only slightly higher than where we began the year as Bart indicated in his remarks, we expect it to drop over a half turn during the back half of 2019, assuming no additional M&A activity.

Over the long term, we plan to run our business at or below three times net leverage ratio and we believe we can reach this goal while continuing to do strategic acquisitions.

Second we review strategic M&A is a vehicle that we can successfully use to quickly expand our position in markets, where we have a presence today.

And as a way to move into new markets, creating an immediate meaningful presence just like we did with the acquisition of some managed which moved us into into the I guess end market.

Given the cash flow characteristics of our model and our historical success at acquiring companies and products and putting them into our highly possible go to market motion. We plan to continue to look for opportunities to add products to our portfolio through M&A, which will allow us to be disruptive in the markets, where these acquired products and Pete.

And while most of the M&A and M&A transactions, we have done historically been small and our future transactions will also likely continually continue to be mainly on the smaller side. Because we were looking for modern technologies that have been architected to be easy to try to show value quickly give me use organizations of all sizes.

We're not averse to taking advantage of opportunities to add meaningful growth engine for our business.

For larger M&A transaction should they become available.

However, just to be clear a point of my comment on this topic has not prepare investors for an announcement, but at the end of an M&A transaction. The next few days.

Or rather I simply wanted to provide context on how we're thinking about M&A. So so to the extent that we do additional acquisitions in the future. There is an understanding of our strategy.

Once again, thanks for joining us for our second quarter earnings call and we will now open up the call for questions.

If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

Please also limit yourself to one question and one follow up question.

Our first question comes from the line of Brad Zelnick from Credit Suisse. Your line is open.

Great. Thank you so much and congrats on the continued momentum and really appreciate all the very thorough disclosure.

My question, Kevin is about security.

With an acquisition in the password management space and also revamping log in event manager can you remind us how you're thinking about security and specifically are you focused on expanding your security portfolio and the MSP space or are you thinking about it more broadly maybe you and where would you go where would you go yes. So Brad good question I think if you. If you look at what we've done so far most of the activity. We've had has been around infrastructure and when you think about security, we think about securities related infrastructure, not really about security as it relates to cut endpoints and necessarily access when you think about the core IP market selling into that IP buyer, who is managing their own environment. So as we think about that market. We really are thinking about areas of security that really more infrastructure related whether that vulnerability management whether that is.

Areas of access management I'm not talking about.

Like a.

Now I'm, drawing a blank, but it's going to be in a minute and talking about single sign on and those kind of technology that felt really more about controlling who has access to what we like those areas of technology. Those are directly related to associated with our current buyer on MSP side of the business a little bit different the other fees need to provide a very broad suite of security offerings to their end customers because the desire of small businesses is to get as much of the technology service they need and when I say technology service I mean product delivered as a service not body based services that he had as much of that technology services. They can from a single vendor Emil will look at all of that through a single you arrive to the extent that they can so many of its peers were likely to think about security and a slightly broader way. So we think about backup as part of securities is continuity. If you have an issue we provide a backup offering in that space. We added password management, because small businesses don't need something like an office simply too big they just need to be able to control password and make sure that path.

Our control is strong and if any to be able to reset a password that into a very very quickly and so it's a much a wider view of access and gave us the market will continue to build out that portfolio of security offering based on what the msps and their end customers are telling us that they need.

That's very helpful context, Thanks, Kevin I, just wanted to follow up by asking about the MSP price increases how is that being absorbed by the market versus what you expected earlier in the year and do you see additional opportunities to take price ahead.

So the price increase has been accepted pretty much the way we thought there would there has been very little noise no real impact on churn at all.

And so that initial.

Test if you will or pilot has gone well, we do believe there is opportunity to implement a price increase strategy as we move forward that has more consistent intuit similar to what we do with our license and maintenance products on the maintenance side, where we in Christ priest price every year and they got to 2.5% to 3.5% range, depending upon the year, depending upon the product. So you should expect that we will have a methodology somewhat like that as we move into 2020, we haven't nailed it down completely we'll provide more visibility into that it'd be closer to the end of the year, but I do think theres opportunity to be able to do that.

Makes sense, thanks for taking the questions I think Brad Thanks, Brian .

Our next question comes from the line of John Difucci from Jefferies. Your line is open.

Thank you.

And actually Kevin a follow up Brad says that that question just asked just to be clear.

In the guidance that the barges gave for next quarter and then or.

The year.

Is there any implied further price increase and in that guidance now there's no additional price increases in that guidance right now we've done everything we're planning to do for this year in both years business as well as in the license maintenance business.

Okay, Great and then that's what I thought I just wanted to clarify there I guess one thing David. This is this is good because.

We covered you Brad has two for one time last time I suppose this time and one of the things about solar ones is it.

The very exciting sometimes around earnings and this is just a solid quarter across the board, which is nice to see it.

I hesitate to say, it's boring, it's not because it's solid it's the great results, but it's not exciting in the other direction at all it's good.

One of the things that you mentioned.

When you're talking about.

Some of the what you're looking at it in your in your guidance some of the future I don't know that caution might be too stronger word, but around EMEA and.

And I'm just I'm just curious you also mentioned despite a bunch of things and you mentioned the acceleration.

In July and I, just wonder if you could expand a little bit more on that says we got through your first month of the quarter.

We're sorry by the way there's other companies are reported Tonight that did not have good quarters had really bad once in sort of interested in infrastructure psyche.

And I'm, just curious as to what you've seen so far in July .

Yes look I think what we what we saw in the second quarter. We saw continuing into the month of July which is activity levels have been solid really across the world.

We've had new I mentioned in my comments we've had.

In really incremental improvement in straight in North America that include both the commercial side of the North American business as well as the US federal side of North America. We've also had very good results for a while now thats continued into the second quarter and into July in Asia Pacific.

And jaromir resulted in solid they haven't been bad that's just on one part of the World. We are seeing a little bit more on even as we are certain countries that EMEA has been very strong certain countries in EMEA had a little more volatility to the demand environment and so we really try to take that into account as we look at what we think could happen in the in the second half of the year. The great thing is 80% of our revenues recurring today.

Most of the revenue we're going to get on the recurring side of the business is deals that we've already both how we will get some revenues from new customers and expansion of existing customers that we add between now and in the year, but thats a relatively small number compared to the total revenue number. So we really haven't seen on change in demand environment in July compared to the second quarter, but we definitely saw in the second quarter, a little bit of noise in EMEA UK is where we saw kind of the most hesitation. If you will particularly around small businesses are I think are just kind of wait to see what happens.

From a retrospective is that we've assumed those trends continue as we look through the rest has the rest of the year. So whether the unevenness, we assume they will continue to be uneven us where we have strength. We've continued to that we've assumed that strength will continue at the levels that has that do not assume that it will get any stronger.

Great. Okay. Thanks, a lot nice job guys. Thanks. Thank you.

Our next question comes from the line of Kirk maternity from Evercore ISI. Your line is open.

Thanks, very much congrats on the quarter and Kevin Thanks for all the color around the macro environment I guess, maybe I just want to start with the some manage integration how thats going and then maybe just as part of that maybe just sort of your broader thoughts Kevin on the cloud portfolio right now and you made some comments around the App management products at the end and that's kind of where you feel like you are sitting in that area right now and sort of the ability for those products really accelerate as we end 2019. Thanks term yesterday, the aggression out some managers gone really well and I think I can really credit most of that add to this management team has worked hard but this management team has been really committed to making sure. The integration process has gone very very well that's integration from both a people perspective, but also.

Their adoption a lot of our operating methodology, because we clearly are a business that is defined set of methodologies in which we operate is what allows us to run at the level of profitability, we run that and still deliver the level of growth you've seen from us over time and they've actually been you are really enthusiastic about learning from us and about being able to leverage those capabilities with no. It's not every acquired company kind of looked at the opportunity that way. So its going really well we feel good about the product we feel good about the market opportunity, we feel better today than we did when we closed the acquisition, which is also not always the case.

So I'm really enthusiastic about our customer showed a lot of interest I mentioned, we've already closed a couple of transaction with solar wind customers in a very short window of time, because we did launch that product into our customer base until June and so we closed on the sale very very quickly and bag with one customer they were long way down the road with a competitor in the sooner. They saw we had the product they started to look at it bought it from us.

In a couple of week period of time, so feel really good about going and we got a lot of work to do we have a lot to learn closing a couple of transactions is not closing hundreds and thousands of transactions in our customer base, which is ultimately the goal, but I feel really good about where we are.

Right now as it relates to the our application management product, which is our cloud based offerings I feel like we are in a good spot from a technology positioning and strategy perspective, I think a much better spot than we were six months ago, and I'll give that to a credit to the fact that I stopped running it directly up with someone else in charge of it every day and they are doing a better job than I was doing.

So I feel like we've got the product positioned well and Weve figured out the story, we need a tail to our existing customers to get them to really understand the incremental value that set of products can provide for them. So I feel like we're positioned well, it's still a small revenue number for us, but I think where we've got it positioned the right way and now the job over the next six months nine months 12 months into really start to drive a very high level of adoption by that had a cloud based product by our existing customers I want to make sure that we are really taking advantage of the azure opportunity right now because we need to own that part of the cloud management market. No. One else is really playing there and Thats, where our legacy is we grew up as a window company, we manage all environments today, but we don't Microsoft environment, We believe better than anyone in all of our key management and we have more customers. We're managing those environments. We believe than anyone else is I want to make sure. We're really capitalizing on that opportunity, so thats, where you're going to see us really spend our time over the next six to 12 months, we'll still continue to do what we do in India.

Yes, but I think there is a really close opportunity that's easy for us to win where there's not a lot of competition right now where we've got a lot of credibility as a provider. So I feel good about where we are now we've got to take what we've done and I will turn that into kind of really explosive growth.

That's great I appreciate Kevin Thanks again.

Hi, Kurt.

Our next question comes from the line of Sangita Singh from Morgan Stanley . Your line is open.

Hi, Thank you for taking my questions and congrats on another strong quarter I want to talk about the on premise business.

In particular, the licensed assess which accelerated this quarter I think coming off a 2018, which is a very strong year for on premise IP. There was a view on the industry that we could see slower growth this year and by me looking at the results in the first time. It seems like you accelerated so I was wondering if you just sort of unpack sort of the factors that you see that's causing you to sustain this really impressive.

License and maintenance growth in the first half of this year.

Yes, I think Theres a couple of factors suggest that we have been talking about and I think we've done a good job of executing on the first yes, I mentioned in my comments that there's a lot of technology is still deployed still being deployed new technology being deployed.

In an environment that IP crows controls, whether that Mike or fall firewall product is theres hosted data centers.

I think those have to manage those technologies I think that one thing we've done most of the other players in the space and not done that have technology to manage those environments really well we've continued to invest in our products. We continue to make them better we continue to give them the ability to solve the problem more effectively than they sold them yesterday and our customers in the market a large si that investment by us and they stated we are committed to continuing to provide them technology to manage those environment. Because we don't believe those farmers are going away anytime soon if ever and that's a big difference when you look at the market our products are simply better than anyone else's and our level of investment is higher and then we're doing a great job I think on the marketing side of telling people all the great things, we're doing with those products. So we're taking share pretty quickly right now and I think we'll continue to take share pretty quickly because there is no. One that has the breadth of products, we have nols investing at the level that we've invested the other factor is as we mentioned this kind of two calls ago I think admitted dray can't remember now that we've now done four days, which is hard to believe that.

Public.

Is that our products are also very relevant in the public cloud World and we've got a number of customers who want to have the exact same level of visibility through the same product in with interact with their infrastructure. This is in the public cloud as their infrastructure that this on premise. So a number of our customers have expanded their use of our customers expanded the use of our product and only make the environment. They control directly but also to manage the assets. They have sitting in the public cloud. So they can see through one you why a consolidated view of performance and so as they do that many of them are having come back and buy more licenses from us because they don't have enough capacity to manage that now larger cumulative environment as I continue to see that trend ROE as we move forward. So it's not just our public cloud management application management product. They are being used to manage the public cloud. It's also that those on premise product because they have the ability to do that also like those are the two things that we've done that have allowed us to.

We continue to grow at a pace that will go at four or five times faster than the market and we feel pretty good about our ability to continue to grow at a very nice high single digit pace in that part of our business.

That's really great to hear and maybe if I ask basically the same question, but for the MSP business. You mentioned in your script that you guys are seeing improved cohort growth is that driven from just.

Greater usage of existing services within the MSP based more and more customer base growth or are you starting to see the uptake of.

A lot of the new products and services that you guys have at least.

Or put out to market the last couple of quarters.

Yes, Hello, there you're looking at couple of factors that are driving that one if you remember I think we talked in January or February about the fact that we wanted to make sure. It was our MSP customer base, we are bringing him in feed into that customer base that were solid stable businesses that we believe will grow over time and then we have made some changes in our compensation program in Q4 of 2018 to make sure. Our reps were focused on bringing customers in and then make sure those customer grow in their first six to nine months of their relationship with us because we have seen historically that if a customer goes in the first six to nine months they will grow for a longer period of time at a faster pace and they'll churn at a lower rate and those that focus has as it has really worked incredibly well that's been really the primary driver of that improvement in core growth. We have now added.

In the second quarter, and we added a couple of years with a couple of product early this year, new product to sell into that MSP customer base.

We are having success with those products were seeing a high level of interest in those products and we are seeing a meaningful level of adoption, but they've done a lot of revenue yet because its anymore. Our model in their usage and new product growth is going to grow really every month, they have that new product. So thats a secondary factor, but one that we believe will have a bigger impact in the second half of the year, but it did in the first half of years, while we have.

High degree of confidence, we're going to continue to see acceleration in that sufficient revenue growth over the second half of the year. Because we are seeing that adopt has started to happen and the customer add real estate added password management and mid to upper 20 employees.

I have one other one of their company if they really like it it works really well in the latter part of the other company now we're up to 100 individuals or bond password management for those are the kind of trends, we typically see with a new product.

Makes perfect sense, Congrats again guys.

Our next on it.

Our next question comes from the line of Heather Bellini from Goldman Sachs. Your line is open.

Great. Thank you so much for the question.

Kevin I, just wanted to talk a little bit about the IP OSAT market and just wondering I know you. It's relatively recently tucked in to the business but.

Could you share with us on the competitive environment.

Maybe what percentage of the market you think is greenfield.

Versus competitive replacement and when you are coexisting with other vendors who lose their most often if you. If you have a sense. Thank you sure. Yes, if you look at the market opportunity Heather.

What I would say is most companies have something that they're using to try to manage at a minimum can I help desk activity. So you submitted a ticket somebody takes that take it out they do something with that ticket. They resolve the ticket and then they go on to the next issue that they need to address for most companies have done something or whether that's a really basic piece of helpdesk software that they've got to have deployed on premise or whether that say.

A spreadsheet, they're tracking will take the call and I believe some flavor not some people still use spreadsheet.

They are using something to try to manage that activity, but when you look at the small business up through the high end of the mid market company that have kind of two or 3000 employees. Most of them are using something I'd define morehead basic helpdesk than true service staff. So they don't really have true workflow management and process management that allow them to be effective and efficient across the management of non away an incentive but also made the management all the assets that IP is responsible for so I really define that as a primarily greenfield opportunity as we want to take those companies from only be able to able to afford and be able to handle the complexity held debt to be able to afford and deal with the complexity is we're going to take all the complexity away of true service debt. So in 85% of the companies that are out there today I think is really more of a greenfield opportunity than anything else in the large enterprise, they're using something they would consider to be I'd avail, but even there there.

Some really good there's no one knows there are a few alternatively, a few good ideas and products out there and there's a bunch of old stuff out there that really isn't very good anymore. So they are there is an opportunity for replacement, but our focus initially is going to be just like when we first got the solar wind maybe medifast for little Big that gets a product is better than our there were major products, where when I got here in 2006. Most of you fast forward to 2009 2010 on the third network management assistance management market, we had a really great set of products that solve the very broad set of problems in the biggest opportunity. We saw that we can take advantage of the most quickly within the mid market and SMB. So we're going to really aimed at the mid market SMB right now we'll win some large companies while we're at it because our customers Trust us and if we offer at a lot of we're going to look at it but our primary focus will be mid market and SMB words, mainly greenfield right now.

Great. Thank you very much.

Thank you.

Our next question comes from the line of Matt Hedberg from RBC capital markets. Your line is open.

Thanks. This is Matt Swanson on for Matt Yeah, We talked last quarter about investing in international markets. I think we called out Germany, specifically could you just talk about with some of the macro unevenness. If this changes from.

Your plans from an investment standpoint, whether it's time to double down or pull back a little from the region.

Yeah. It doesn't really change any of our plans we've already begun the investment process in Germany.

We have moved a senior leader to Germany, and we have got to add resources in that market to really take advantage. The opportunity. We have we do a decent amount is the Germany already but as I've said before Germany should be our largest single market in Europe , and it's not and I tell you. We closed our single largest market in Europe and so there is a big growth opportunity for us So that investment is already well underway in your moving down the path and hopefully by end of this year, we'll start to see some level of impact from that investment. We also talked about moving our application and cloud management product globally that will happen in the third portable add sales reps outside the U.S. and start to do some marketing outside the U.S.. We do believe there is opportunity there in the last thing we had briefly mentioned it today, we're going to start to invest in it but don't ask me about it every quarter, but it's going to be slow in Japan. We've added we have we have added a general manager Japan, We've increased investment just by a small amount in Japan are beginning to drive some activity that will be the least impactful in the short term of our investments, but I believe it is a big opportunity in the long term, but it is going to be about.

Slower burn so no nothing we've seen is going to change the investment strategy or pace than we had planned for this year.

That's helpful and then if I could just circle back on the <unk>. Some product could you just talk about from a capability standpoint, what kind of all change from a product that's replacing in the log and event management.

Yes, so really what we've done is we've taken a product we have and we have really improved the security positioning of that product.

And every launch did with a lot of the same message year round. In addition, we did much front end work on it to improve the user experience and so while the product historically and really going out with kind of the compliance use case of law is being used by a lot of.

Companies that deal things like HIPPA compliance that goes out regional bank small insurance companies on the compliance side of security, which is an area security, we really like because that doesn't really change that rapidly that allows you to build the technology to roll with low cost not have.

Hi cost of costly revving the product, but what we've done is that product had a lot of security information and event capability. We just hadn't brought them to the surface through the right. So the real work we had to do was do work around that you try to bring the events that were seeing to the surface. So that a customer could actually see them and so we have we've made that product. So it's a much more kind of broad use case than it was before so.

Relatively views really use compared to any other some product that was ABTS used product that we own but it's a very easy to use cutting and assembling and price at a fraction of the competitors in the marketplace. So it is a.

Really good strong basic you along based news and log data to capture these security information and event tell you what happened until you what you need to do to address the issue and do that very quickly.

I do it in a really low cost so it's a really great little product.

And I think with the changes we've made in it we do know that we expect that that product will start to grow at a faster pace than has been growing.

Thank you.

Yep.

Our next question comes from the line of Terry Tillman from Suntrust. Your line is open.

Hi, guys. This is actually Nick on for Terry Thanks for taking the question.

So I guess looking at the long term model, how should we think about investing for growth versus showing further operating leverage.

The company already has tremendous profit level. So can you keep doing this steadily and where some more interesting areas, where operating leverage could potentially play out.

So yes. This is this is bart payment.

So we talk about the fact that we're going to invest you know.

Wisely is what I would say so.

We we know that Leverages is a touchy subject to some of our investors. So we're committed to getting our leveraged at closer to that three times number.

But we're going to do that you know overtime and.

We're not going to let M&A stand in the way of us doing deals of us impacting our leverage. So we know that you know minus in the other M&A activity will be around 3.5 times levered at the end of the year.

But I am both theres the opportunity out there for us to do a deal we're not going to do it just in spite of the fact that our leverage that we're committed to getting to a certain leverage number and from a profitability perspective, I think we have.

We what we've consistently said, we're going to we're going to let the margin rise were a little more rise a very measured pace.

That we are not go out and get out in front of us that our model has the ability to enroll a tremendous level of profitability.

It can be more profitable very very quickly as we would like it to be and so it's really that the approach. We've taken is we're going to let margins rise low rise relatively slowly oil rise rolling slowly over a number of years because there is a decent amount of expansion left in our margin profile, but we're not going to let it come up annual point a year not that the bottom the model won't do that it could as you're building thats the right the right.

This is your approach to make we will we'll let it come up slowly we'll invest some of the margin would have naturally come through to continue to drive growth, but you should expect margins to continue to come up at a very measured pace over time.

Okay, great. Thanks, guys.

Our next question comes from the line of Matthew Willie from Citi. Your line is open.

Hey, Matthew Wells from Citi.

Kevin Thanks for taking my question and in the quarter license in maintenance looked pretty strong I'm. Just curious if you observe any changes in the competitive landscape in the core network management business, specifically, how you're positioned as the on Prem customers move to the cloud.

Yes, I think that.

No never management business, we have not seen any really any change real change in competitive positioning I think what we have seen and this is something we've been saying for a long time is cloud does not remove the critical nature of the network in that cloud makes the network more critical than it was before or you can access those assets. If you don't have connectivity to those assets into that connectivity is not really strong. If you don't have fast connection of that connection is not always available when you need. It then the ability to get to those assets that are deployed remotely from the user becomes a real issue. So never performance is a bigger issue today than it was three years ago, and we think network performance will continue to be a larger issue as we move into the future that is even today. So we have the opportunity and our management is not one that will shrink with cloud in fact is one that we need to grow with applications deployed in the public cloud and we think we're well positioned to be able to provide a set of capabilities to our customers and the prospects for that matter, we will remain at not only their environment inside.

The firewall with managed their connection between that environment and what is in and the public cloud and then also to be able to manage any connection that need to be met managed in order to share performance high in the public cloud so not saying we have every piece of functionality. We believe we ultimately need we dealt as our sales and things we need to add to our dealer management capabilities as a level demand gets to a higher level. As you know we are typically billing in advance of demand. We're building behind demand grew when demand to exist one of the problem to be understood, whether you'll be able to tell us here is exactly what I need to solve the problem by app store or to take advantage of the opportunity in front of me number one on build something for them, they're going to use it immediately and it's going to be successful. So there's still some things ultimately we believe we will need to add to that never management portfolio as cloud continue to evolve and grow but waiting we're really well positioned for where the world is right now.

Thanks, Thats helpful color and I just had a follow up kind of switching gears last quarter, you spoke to 30 plus percent growth rates in that the amendment you asked that after owning it per quarter do you have any incremental confidence here.

I would say I'm just as confident as we were in the last quarter. When we gave the outlook I think there is absolutely an opportunity just given the size of the market and to be able to grow faster than that over time, we feel have they indicated we have a lot to learn how do we get this into our customer base. We know our customers are interested in the product how do we don't actually buy the product. We've got on some small success already which is great, but I want to turn small success into large success like we're going to learn a lot over the next two quarters that will give us better visibility into what is going to take to make those growth rates, even faster than what we laid out on the last call, but our confidence in the growth rates, we laid out on them on the last call continued to be high.

Makes sense, thanks for taking my questions.

And then we we have time for one more question.

Thank you and our last question comes from Raimo Lenschow from Barclays. Your line is open.

Hey, guys. This is mohit on for Raimo. Thanks for squeezing me here.

So I would also my congrats on the quarter was one.

Great numbers across the board.

And I think I just want to ask a high level question in terms of the product roadmap.

No. So you guys touched on.

Sounds like security you guys touched on application management, and what's going on there and obviously the the leadership, we recently met with management from Im wondering if he if we look from a lens of where you are now versus where you wanted to be.

Specific to <unk>.

Integrating yeah.

Ops across the portfolio I am just wondering if you can unpack as to where do you think you are in that journey and there are you paying sort of like you would want to be as the I'll just get us more steam among the customer base. Thanks for taking my question right Yes.

We are as it relates to payoff the word or really basic level, we have some amount of AI capability across the portfolio. So we have that in our core network. Insys has made her product we have some in our ideas and products and we've got some debate really basic capabilities in our MSP product line. So we have some really vacant capabilities, but we are really early and very basic and why.

It really goes back to the comment I made just couple of minutes ago, which as you know we are going to build technology behind the growth in demand for that technology, I will wait and make sure that we really understand is the more importantly that the user really understand exactly what they want to exactly what they need and they can tell a very clearly what that is because once they can tell very clearly what that is then I can build those helping with that we will meet their needs to use the word perfectly or is a perfectly as a piece of software can be built and I can price. It at a level that's going to make it really really compelling where if I try to gas and I tried to build in advance of that try to convince you. What you need that's a whole different value proposition. So I think we're right where we need to be right now which is we have some really basic capability, we have and understanding of the technology, but we are waiting for the market to mature. So we have a very clear view of exactly what it is that users are going to want because there's a lot of things you could do.

But a lot of that you shouldn't do and a lot of that you won't need to do and we want to wait until that.

This is really fully fleshed out and keep in mind. We are trying to serve the entire market were very small very very large added AI as something that very large companies are playing with they're not super comfortable with meaning you don't really lowered.

It really large company. They are using the product has some level of AI. What I'll guarantee you is right now, they're not allowing that product on an automated basis based on that AI to make changes to their environment, they're allowing it to tell them what it should do in 99% of over stopping it and making sure. They're okay with it were before the changes made because even they don't have the level of comfort yet that they just want to let all that happened in automated basis, because there is not right a lot of bad things can happen. So we're super Super early in that part of the market right now, but I think we're right, where we would want to be and we will be there when we need to be there with the capability that the every well you'd or that the every man needs. So the IP Guide every company, we won't be there in the short term with the things that only the fortune 501.

<unk>.

So with that I think we're going rest Colin thanks, everyone for listening to the call.

And this concludes today's conference call you may now disconnect.