solarwinds(US:SWI)2022-05-05 20:00Financial Data and Key Metrics Changes - Total revenue for Q1 2022 was $177 million, exceeding the high end of the guidance range of $173 million to $176 million, representing a 2% year-over-year growth [17][27] - Adjusted EBITDA was $69 million, with an adjusted EBITDA margin of 39%, also exceeding expectations for the quarter [17][35] - Subscription revenue grew by 37% year-over-year, driven by the conversion of a large customer to a term subscription [19][29] - Subscription ARR as of March 31, 2022, was $142 million, reflecting a 30% year-over-year increase [30] Business Line Data and Key Metrics Changes - License revenue for Q1 2022 was $22.6 million, a decline of approximately 9% compared to Q1 2021 [33] - Maintenance revenue was $115.5 million, down 4% year-over-year [30] - The company reported an in-quarter renewal rate of 91%, returning to historical norms in the low to mid-90s [18][32] Market Data and Key Metrics Changes - The company anticipates a market opportunity of approximately $60 billion by 2025, aiming for at least $1 billion in ARR by that time [13] - The company noted currency headwinds, particularly with the euro being 9% lower than when initial guidance was provided [37] Company Strategy and Development Direction - The company is focusing on a subscription-first mentality and transitioning to platform-based solutions, highlighted by the launch of a hybrid observability solution [12][26] - The strategy includes consolidating tools for customers to enhance visibility and integration, leading to larger deal sizes [20] - The company aims to achieve compounded annual subscription ARR growth of over 30% through 2025 while maintaining EBITDA margins in the mid-40s [13] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenging macro environment, primarily due to currency fluctuations, but noted limited direct impacts from geopolitical issues [58] - The company expects total revenue for Q2 2022 to be in the range of $174 million to $177 million, indicating a year-over-year decline of 2% to flat [38] - Full-year guidance remains unchanged, with total revenue expected between $730 million to $750 million, reflecting a year-over-year growth of 2% to 4% [39][43] Other Important Information - The company completed the spin-off of the N-able business on July 19, 2021, and the results presented reflect SolarWinds as a standalone entity [7] - The company has not historically hedged its interest rate exposure, with all debt subject to variable interest rates [102] Q&A Session Summary Question: Insights on the large customer conversion to subscription - Management indicated that the conversion was driven by the value proposition of hybrid observability and the consolidation of vendor products [53][54] Question: Impact of macroeconomic conditions - Management highlighted that FX is the primary concern, with limited direct impacts from geopolitical issues [58] Question: Health of SME spending globally - Management believes SME spending will remain robust, driven by demand for efficiency and security solutions [61][62] Question: Interest expense exposure to variable rates - The company confirmed that all of its $1.9 billion debt is subject to variable interest rates, which will impact cash flow as rates rise [64] Question: Metrics for observability platform success - Management emphasized the importance of subscription revenue growth and subscription ARR as key metrics to monitor [65][66] Question: Feedback on node-based pricing model - Positive feedback was received regarding the flexibility of the node-based licensing model, which is expected to enhance sales velocity [72][73] Question: Recent acquisition of Monalytic - The acquisition was aimed at strengthening the company's position in the federal and public sector space [75] Question: Sales motion and hiring focus - The company is focusing on inside sales while selectively hiring for enterprise sales roles [80][81] Question: Guidance clarity on FX impact - Management provided insights on constant currency growth rates and the expected impact of currency fluctuations on revenue [85] Question: ARR expansion from maintenance to subscription conversion - Conversions are expected to yield higher ARR, with early indications showing a conversion multiple greater than one-to-one [90][92]