Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- SolarWinds Corp (SWI, Financial) exceeded its guidance across key metrics, demonstrating strong performance in a challenging software spending environment.
- The company reported a 31% year-over-year growth in subscription revenue and a 36% increase in subscription ARR.
- Customer retention metrics remained robust with a 97% maintenance renewal rate, consistent with the previous quarter and up from 94% in the same quarter of the prior year.
- SolarWinds Corp (SWI) achieved double-digit adjusted EBITDA growth of 17% year-over-year.
- The company successfully refinanced and extended its debt, reducing the interest rate by 50 basis points and extending the maturity to February 2030.
Negative Points
- Maintenance revenue declined by 5% year-over-year as the company continued to convert existing customers to its hybrid cloud observability product.
- License revenue decreased by 17% from $16 million in the second quarter of 2023 to $13 million in the second quarter of 2024.
- The macroeconomic environment remains challenging, with no significant positive progress or material deterioration noted.
- The company's net leverage ratio increased to approximately three times its trailing 12-month adjusted EBITDA, up from 2.7 times at the end of the first quarter.
- Despite strong subscription ARR growth, subscription revenue has been relatively flat, indicating potential variability in revenue recognition.
Q & A Highlights
Q: What did you see during the quarter in terms of the macro environment, and how was the linearity in the quarter? Can you also talk about the pipeline going into Q3 and the second half?
A: From our vantage point, there has not been any meaningful difference in the macro environment from Q1 to Q2. The value proposition of our solutions continues to resonate with customers, focusing on tool consolidation, hybrid visibility, and cloud transition. Our pipeline generation activities remain strong, and we are extending our partnerships to reach more customers while maintaining expense discipline.
Q: Are we going to see most of these AI capabilities, including the one in the service desk, in the cloud? Do we expect that to motivate customers to accelerate migration towards the cloud? How are you monetizing the service desk AI product?
A: AI is not restricted only to our service desk product; it permeates through our observability platform. The AI capabilities in our service management product will be in one of our premium tier products, which has a higher ASP. Customers can leverage our AI capabilities by connecting to the cloud, even if their deployment is self-hosted.
Q: How big of a driver is the hybrid cloud observability solution for large customers over 100,000 ARR, and what does adoption look like?
A: Hybrid cloud observability is a significant driver across the board, especially for larger customers. It offers an elegant tools consolidation story and hybrid visibility, appealing due to its simplicity in packaging and pricing. Larger customers tend to have more tools and fragmentation, making our solution more compelling.
Q: Can you explain the guidance for Q3, particularly why it is just 2% growth after the first half of the year grew 4%?
A: Our guidance for Q3 is consistent with our approach for the first half of the year. We aim to provide prudent guidance that we feel confident in achieving, reflecting our performance and the current macro environment.
Q: Do you see any opportunities to increase investments to drive growth in either the go-to-market or product sides of the business?
A: We continue to evaluate investment opportunities, focusing on balancing growth and profitability. Our goal is to consistently deliver mid-40s EBITDA margins. We will consider accelerating our roadmap and scaling our go-to-market efforts based on growth prospects, macro conditions, efficiencies, and sustainability.
Q: What gives you the confidence to raise guidance for the back half of the year, especially when others in software are cutting guidance?
A: We have outperformed in the first half of the year, and there is nothing in the macro environment or internal demand that makes us see things differently. A significant portion of our bookings comes from existing customers who see the value in our products and transformation to hybrid cloud observability and SaaS products.
Q: Why is subscription revenue flatlining despite strong subscription ARR and total ARR growth?
A: Subscription revenue comes from various booking types, including on-premise subscriptions with different revenue recognition compared to SaaS products. Variability in revenue recognition, especially with large on-premise subscription customers, affects quarterly figures. We expect an increase in subscription revenue in the back half of the year.
Q: Can you provide more color on the pace of maintenance to subscription migration?
A: We have been achieving our plans and expanding our market opportunity. The conversion approach has expanded from North America to EMEA and now APJ, showing consistent results across geographies. As more partners and sales teams adopt this primary motion, we expect continued momentum.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
