solarwinds(SWI)2023-11-02 20:14Financial Data and Key Metrics - Q3 subscription revenue was $59 million, up 39% YoY, driven by the success of the subscription-first strategy and multi-year arrangements [3] - Maintenance revenue was $116 million in Q3, up 2% YoY, attributed to high renewal rates and price increases implemented at the start of the year [3] - Total revenue for Q3 was $190 million, a 6% increase YoY, exceeding the guidance range of $182-186 million [30] - Adjusted EBITDA for Q3 was $85 million, representing a 45% margin and a 21% YoY growth, the highest since Q4 2020 [25] - Non-GAAP fully diluted EPS is projected to be $0.83-$0.85 for the full year, assuming 166.4 million fully diluted shares outstanding [5] - Total ARR reached $668 million, up 8% YoY, with subscription ARR at $213 million, up 34% YoY [30] Business Line Data and Key Metrics - Subscription revenue growth reflects the ongoing success of the subscription-first strategy, with a higher percentage of new deals sold as subscriptions [3] - Hybrid Cloud Observability solution continues to gain widespread adoption, helping customers reduce tool sprawl and alert fatigue through AIOps services [26] - The company launched an upgraded version of its Database Performance Monitoring and DataOps solution, SQL Sentry, enhancing customers' ability to prevent database performance issues [27] - The Transform Partner Program was updated to accelerate growth and revenue for partners, with new opportunities for channel offerings and specialized options for database and ITSM products [68] Market Data and Key Metrics - The company's customer base is diversified across sizes and industries, with 955 customers spending over $100,000 in the last 12 months, an 8% increase YoY [25] - The Federal segment remains a strong area of growth, with continued expansion and high customer loyalty [9] - The SME sector shows robust demand, with mid-market customers investing in solutions to reduce complexity and improve productivity [10] - The company sees consistent demand across North America, Europe, and APAC, with transaction counts increasing despite macro challenges in EMEA [65] Company Strategy and Industry Competition - The company is focused on driving subscription adoption, improving profitability, and retaining customers through its subscription-first strategy [28] - The Hybrid Cloud Observability and SolarWinds Observability solutions are positioned as the most comprehensive AI-powered full-stack observability solutions in the industry [26] - The company is committed to public-private partnerships to improve cybersecurity and respond to cyberattacks, despite concerns about the SEC's actions [6] - The company is making selective investments in its product portfolio and go-to-market strategies, which are starting to yield results [39] Management Commentary on Operating Environment and Future Outlook - The company believes it is well-positioned to achieve its fiscal year goals and enter 2024 with strong momentum, despite macroeconomic challenges [2] - The company expects to grow its top-line in 2023, driven by an expanded product portfolio, improved execution, and strong customer renewal rates [4] - The company is focused on improving its profitability profile and maintaining expense discipline in a challenging macro environment [4] - The company raised its full-year revenue guidance to $749-753 million, representing 4% YoY growth, and adjusted EBITDA guidance to $322-324 million, representing 15% YoY growth [71] Other Important Information - The company received multiple industry awards, including the 2023 Cloud Security Award for the best security infrastructure in enterprise and the Gold Global Award as Most Innovative Company of the Year in the cloud SaaS category [58] - The company is working to reduce its net leverage ratio, which improved to 3.2x trailing 12-month adjusted EBITDA, down from 3.9x at the end of the previous year [32] - The company expects to pay approximately $8 million in cash taxes during Q4, with a non-GAAP tax rate of 26% [33] Q&A Session Summary Question: Drivers of growth in larger customers (spending over $100,000) - The company attributes the growth to delivering greater value to customers, including eliminating tool sprawl and consolidating vendor tools onto the SolarWinds Platform [74] Question: Public sector and Federal customer demand in Q3 - The company saw good demand in Q3, with some deals slipping into Q4 due to continuing resolution issues, but overall results were strong, reflecting the diversity and robustness of solutions across all verticals [9] Question: SME market health and customer spending trends - The SME sector shows robust demand, with mid-market customers investing in solutions to reduce complexity and improve productivity, while large enterprise deals face longer approval cycles [10] Question: New ESM product reception and typical customer profile - The new Enterprise Service Management (ESM) product is aimed at mid-market customers, particularly those where the CIO plays a significant role in technology decisions [78] Question: Potential upside in Q4 due to budget flushes - The company is cautious in its Q4 guidance due to macro headwinds but plans to exceed the guidance, with potential upside from budget flushes [63] Question: Vertical performance in Q3 - The company saw consistent results across all verticals, with traditional traction in the Federal segment despite government shutdown-related issues [67] Question: Net new ARR contribution from migrations and growth portfolio - The company noted that migrations often involve customer expansion, with consolidation of tool sprawl and preparation for the cloud contributing to ARR growth [50]