SolarWinds Q1 2023 Earnings Call Transcript

There are 11 speakers on the call.

Operator

Hello. My name is Jean Louis. Welcome to the SolarWinds First Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer I will now turn the conference over to Tim Khuraja, GVP of Finance.

Speaker 1

Thank you. Good morning, everyone, and welcome to the SolarWinds Q1 2023 earnings call. With me today are Sudhakar Ramakrishna, our President and CEO and Bart Kalsu, our CFO. 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.

Speaker 1

Solarwinds.com. You can also find our earnings press release and a summary slide deck, which is intended to supplement our prepared remarks during today's call. 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 evolution to a subscription first mentality and the timing of the phases of such evolution, Our expectations regarding our partner ecosystem, the impact of the global economic and geopolitical environment on our business and our gross 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. 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.

Speaker 1

Copies are available from the SEC on our Investor 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 as well as 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. 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 follow our quarterly report on Form 10Q.

Speaker 1

With that, I will now turn the call over to Sudhakar.

Speaker 2

Thank you, Tim. Good morning, everyone, And thank you for joining us today. As always, I'd like to thank our employees, customers, partners and shareholders for their ongoing commitment to SolarWinds. We had a strong start to the year, building off the momentum we saw in Q4, which I attribute to our broad portfolio of solutions, the compelling value we deliver to customers, the trust our customers place in us, the resiliency of our business model and our ongoing improvements in execution. 1st quarter highlights included substantial subscription revenue and ARR growth demonstrating the fruits of and subscription first strategy, which we have been driving for over 1 year now.

Speaker 2

Growing contribution from our observability solutions bolstered by balanced growth in our service management also known as ITSM and database monitoring product lines. Continued excellence in customer retention demonstrating the value proposition of our solutions Double digit year over year adjusted EBITDA growth along with increasing margins reflecting our commitment to expense and operating discipline and continued progress with our partners and global system integrators as we expand our reach to customers through our partners in a scalable and cost effective manner. Now I'll turn to Q1 financial highlights. I will touch on some of these before turning it over to Bart for more color on the quarter and our financial outlook for Q2 2023 and the full year 2023. In Q1 2023, we delivered total revenues of $186,000,000 above the high end of the range we provided representing a 5% year over year increase.

Speaker 2

We are seeing the benefits of our subscription first transformation and delivered 1st quarter subscription revenue growth of 40% year over year and subscription ARR growth of 31%. As I've said before, I consider our evolution to subscription not just as a business model change, but as a way of delivering greater value to customers. Now that we are a year into this transformation, we see the compounding benefits of converting maintenance to value added subscriptions. We believe This lays the foundation for even more predictable revenue and the opportunity to expand our lifetime value with customers. I'm excited to report that in Q1, our in quarter maintenance renewal rate was 94% and our trailing 12 month renewal rates are now at 93%.

Speaker 2

The trailing 12 month renewal rate is the highest since Q4 of 2019 showing continued improvement and reflecting the value of our solutions. We ended the Q1 of 2023 with 9.45 customers who have spent more than $100,000 with us in the last 12 months, an increase of 11% over the comparable period in the previous year. We are increasingly helping our customers reduce tool sprawl, Achieve comprehensive visibility across multi cloud environments, eliminate alert fatigue and accelerate their business transformations, all while improving their productivity. Doing so has enabled us to win larger deals. Adjusted EBITDA grew 12% year over year to $77,400,000 representing an adjusted EBITDA margin of 42% and above the $67,000,000 to $70,000,000 outlook we gave for the quarter.

Speaker 2

I'll now turn to some business highlights. Turning to some business highlights from the quarter. I'm pleased with our progress in expanding our product portfolio and growing our partner ecosystem. On the product front, last year was a transformational year for SolarWinds as we evolved from a monitoring vendor to a comprehensive observability solutions provider with the introduction of our hybrid cloud observability and SolarWinds observability SaaS solutions. We will continue uniquely integrating our SolarWinds platform solutions to give customers the best value in multi cloud environments across networks, applications, databases, systems, users and things.

Speaker 2

I believe our ability to address these needs of functional, departmental and executive teams will continue to create broad appeal for our solutions across a variety of verticals and geographies. To support the demand we are seeing for our solutions during the quarter, We extended the geographic footprint of our products with the opening of new data centers in Europe and Asia Pacific. In Europe, we expanded the reach of our SaaS observability solutions by opening a new data center in Germany. The data center will allow more AWS customers to access SolarWinds observability so they can manage their hybrid and multi cloud IT Environments. And in Asia Pacific, we announced the launch of our first ITSM data center in Australia for our Service Desk customers.

Speaker 2

The new ITSM data center is set to enhance our SaaS offering and expand customer availability to Australian customers and also businesses throughout Asia Pacific and Japan region, reflecting our ongoing commitment to the APJ region. As we evolve the SolarWinds platform, we aim to deliver observability solutions across network, infrastructure, systems, applications, databases, digital experiences and log monitoring in private and public clouds with a single plane of gas visibility. Our solutions have earned multiple industry awards and recognitions in recent months and in Q1 Forrester Research named us amongst notable AIOps vendors in its Process Centrics AIOps Landscape report. We believe our hybrid cloud observability solution is the only true hybrid solution that allows customers to migrate from on premises to SaaS at their own pace. And while it's early days, we are excited about our ability to support customers regardless of where they are in the cloud journey with the flexibility to deploy on a private cloud, public cloud or consume it as a service.

Speaker 2

We are also making progress on expanding our customer reach through our Transform Partner Program launch last year, critical GSI relationships and the ongoing evolution of our internal teams. In Q1, we held partner summits in all three of our major geographies and a virtual partner summit for the public sector demonstrating our growing commitment to channel partners. As an example of our progress, we launched the HCL iObserve powered by SolarWinds, a joint development project with a key GSI partner. We believe the partner ecosystem represents a 4th multiplier in our efforts to reach more customers in a cost effective and scalable fashion. It was very satisfying for me to see the palpable excitement of our partners who attended our summits.

Speaker 2

I continue to visit our customers and partners throughout the world. Costs, budget, Complexity and productivity continue to be significant challenges exacerbated by macro conditions. All the same, customers continue their business transformation journeys and view our solutions as key to addressing these challenges. Customer conversations reinforce my belief in our strategy and execution abilities to deliver disproportionate value. Now I'd like to remind you of the priorities we laid out for you last quarter.

Speaker 2

Looking further into 2023, We believe IT environments will continue to grow in complexity, while budgets remain constrained. Therefore, customers will value solutions that improve productivity and lower cost. I believe our comprehensive observability, Service Management and database products and services are ideally suited to address these growing challenges. It is also my belief that by establishing all our ongoing innovations on the SolarWinds platform, We can deliver even greater simplicity to our customers while creating the ability to expand the lifetime value of our customer relationships. Following a transformational 2022, we believe we are emerging as a much stronger player demonstrated by our ability to deliver top line growth and expand margins in Q1.

Speaker 2

We are seeing success and we believe the diversity of our customer base across all sizes and industries and our focus on attractive growth markets should allow us to weather the challenging economic conditions. Our 4 Key near term priorities are as follows. 1st, we continue aggressively seeking to drive subscription adoption across our businesses. We believe this is consistent with how our customers want to consume our products and the key to our goal to achieve $1,000,000,000 in ARR atmid40sadjusted EBITDA margins. We also believe an increase in our subscription base provides an even more solid foundation for our revenue and margin expansion efforts.

Speaker 2

2nd, we continue to exercise expense discipline in a challenging macro environment. We expect to continue to look for opportunities to invest selectively while managing expenses and improving our operating margins. As I've said many times, we have an experienced management team that has led companies through many economic cycles. We believe our resilient business model should allow us to deliver healthy levels of growth and expand profitability. 3rd, we remain very focused on customer retention and expansion efforts as we have been for the past 24 months.

Speaker 2

And 4th, continue our portfolio evolution and expand our hybrid cloud observability and SolarWinds observability solutions along with our industry leading database and service management solutions. With that, I will turn it over to Bart to expand on our financial performance and provide a Q2 and full year outlook. Bart? Thanks Sudhakar.

Speaker 3

I want to remind everyone that as we discussed throughout 2022 and as Sudhakar just outlined, One of our top areas of strategic focus is growing with a subscription first mentality. Our subscription transition will be multifaceted. The first phase has entailed selling subscriptions for our existing on premises products and our hybrid cloud observability product. The second phase began with the recent launch of SolarWinds Observability, our SaaS solution. We expect these two models of subscription growth Our business and our overall focus is to grow subscription ARR while exercising operating discipline.

Speaker 3

I also want to remind you that our subscription transformation will negatively impact new perpetual license sales. Our first quarter results reflect our ongoing progress with this transition and another quarter of solid execution. Turning to the numbers. We finished the Q1 with total revenue of $186,000,000 which is a 5% increase compared to the prior year and above the total revenue range of outlook we provided of $177,000,000 to $182,000,000 You will notice a meaningful shift in our mix of revenue, which is reflective of our subscription transformation. We continue to have a larger percentage of our new sales as subscription products.

Speaker 3

We ended the Q1 with a total ARR of $648,000,000 up 5% year over year. Our Subscription ARR as of March 31 was $185,000,000 which is an increase of 31% year over year. This growth is mainly due to the execution of our subscription first strategy and the continued conversion of a portion of our maintenance base to the hybrid cloud observability solution. Digging into the revenue details, our Q1 subscription revenue was $54,000,000 up 40% year over year. Our subscription revenue growth reflects the ongoing success of our subscription first efforts.

Speaker 3

We are also seeing the results of the conversion of a portion of our to the hybrid cloud observability product. We continue to convert maintenance customers at a higher than 1:one ratio as they see the value of our product and the need to manage their hybrid IT environment. Maintenance revenue was $114,000,000 in the first quarter, which is a decrease of 1% from the prior year. As we have discussed recently, our maintenance revenue has been impacted by the conversion of a portion of our maintenance customers to subscriptions and a larger percentage of new sales as subscription products. Our maintenance renewal rate is 93% on a trailing 12 month basis and at 94% for the Q1.

Speaker 3

The trailing 12 month rate was the highest since Q4 of 2019. We believe this is a testament to the loyalty of our customer base and our focused customer retention and expansion efforts. Note that as we convert maintenance customers to subscription arrangements, We exclude those customers from our renewal rate calculation. As a result of the growth in subscription revenue and strong maintenance renewal rates, We now have 91% of our total revenue as recurring revenue. For the Q1, License revenue was $17,000,000 representing a decline of approximately 24% compared to the Q1 of 2022.

Speaker 3

Remember that our subscription model transformation has been in place for over 1 year now and therefore we expect new perpetual license sales performance will continue to be negatively impacted. Our increased subscription sales offsets the decline in license revenue in the quarter. We finished the Q1 of 2023 with 9.45 customers who have spent more than $100,000 with us in the last 12 months, which is another quarter of improvement over the previous year and an increase of 56 customers since the start of the year. I'm also pleased to report that we delivered another quarter of strong non GAAP profitability. 1st quarter adjusted EBITDA was $77,400,000 growing 12% year over year, representing an adjusted EBITDA margin of 42% and coming in above the $67,000,000 to $70,000,000 outlook we gave for the quarter.

Speaker 3

Excluded from adjusted EBITDA in the Q1, our one time net proceeds of approximately $7,800,000 related to the expected insurance reimbursements, offset by litigation and governmental investigation costs and other professional fees related to December cyber incident as well as certain restructuring charges. We expect one time cyber incident related costs to continue to fluctuate in future quarters and these one time cyber costs are very difficult to predict. As we discussed in our earnings call in February, we are focused on our capital allocation, Disciplined expense management and driving operational efficiencies across all aspects of our business, while focusing on growth and broader subscription transition. Given the uncertain macro outlook for 2023, in Q1, we made optimizations to our expense structure as part of our ongoing focus on improving operating margins. These optimizations resulted in $11,000,000 of restructuring charges, primarily associated with $7,000,000 of lease impairments for certain office locations and costs related to headcount reductions.

Speaker 3

Looking ahead, we will continue to monitor the environment closely and we plan to hire selectively and continue to manage our costs in a disciplined manner. Turning to our balance sheet. Net leverage at March 31 was approximately 3.8 times our trailing 12 months adjusted EBITDA. Our cash and cash equivalents and short term investment balance was $141,000,000 at the end of the first quarter, bringing our net debt to approximately $1,100,000,000 Remember that in November, we refinanced our debt and extended the maturity date from February of 2024 February of 2027. We continue to seek to bring down the leverage further with adjusted EBITDA expansion and plan to evaluate opportunities for further debt payments in the coming quarters.

Speaker 3

I will now walk you through our outlook before turning it over to Sudhakar for some final thoughts. I will start with our Q2 guidance and then discuss what it means for the full year. In formulating guidance, we are optimistic that the momentum we saw in Q1 should allow us to grow our top line in 2023, driven by our expanded product portfolio and ongoing improvements in execution as well as our strong installed base and customer retention. That said, although we generally continue to see healthy demand and commitment from our customers, we are mindful of the macro headwinds affecting all areas of IT spending and the potential for deterioration this year. Accordingly, our outlook carefully takes into account macroeconomic conditions and the impact of our subscription first business model transition.

Speaker 3

We remain focused on our strategy and what we can control and are committed to continuing to improve our profitability profile in 2023. For the Q2, we Total revenue to be in the range of $177,000,000 to $182,000,000 representing a 2% year over year growth at the midpoint. Adjusted EBITDA for the 2nd quarter is expected to be approximately $69,500,000 to $72,500,000 representing 6% year over year growth at the midpoint. Non GAAP fully diluted earnings per share are projected to be $0.15 to $0.17 per share, assuming an estimated 164,400,000 fully diluted shares outstanding. And finally, our outlook for the 2nd quarter assumes a non GAAP tax rate of 26 percent and we expect to pay approximately $17,800,000 in cash taxes during the 2nd quarter.

Speaker 3

For the full year, we expect total revenue to be in the range of $725,000,000 to $740,000,000 representing 2% year over year growth at the midpoint and unchanged from the guidance we issued in February. We are increasing the full year adjusted EBITDA to be between $295,000,000 $305,000,000 representing a 7% year over year growth at the midpoint. This is compared to the previously provided guidance for the full year of $290,000,000 to $300,000,000 We will continue to make selective consistent with our priorities and remain very committed to improving efficiency and profitability and control what we can control in parallel, Focus on top line growth as we have made meaningful investments in our product portfolio and go to market strategy and believe that these investments are starting to pay dividends. Non GAAP fully diluted earnings per share is projected to be $0.71 to $0.76 per share, assuming an estimated 100 66,300,000 fully diluted shares outstanding. Our full year and second quarter guidance assumes a euro to dollar exchange rate of 107 to 1.

Speaker 3

With that, I'll turn the call back over to Sudhakar for his closing remarks.

Speaker 2

Thank you, Bart. I'm very excited about the progress our teams continue to make as evidenced by our strong Q1 performance on both revenues and adjusted EBITDA. We believe our diversified portfolio of observability, Service management and database monitoring offerings is appealing to a broad, diversified and growing customer base. We are making significant progress in our initiatives to deliver compelling ongoing value to customers via our subscription first mindset, solutions that deliver best time to value, best time to detect issues and best time to remediate issues in their multi cloud environments via simple, secure and powerful solutions and expanding margins even as we deliver top line growth and evolve to more predictable subscription revenues. The macro environment continues to present challenges to the broader software industry.

Speaker 2

Even so, I'm confident that our strategy, portfolio and customer success Orientation will be appealing to customers across all geographies and verticals. We will continue to exercise expense discipline, invest selectively and strive to deliver revenue growth and expanding margins. I'll again conclude by thanking our employees,

Operator

Your first question comes from the line of Sanjit Singh. Please go ahead.

Speaker 1

Hi, Sanjit. Can you hear us?

Speaker 4

Yes. Can you hear me?

Speaker 3

Yes, we got you.

Speaker 5

Yes, sorry about that. So congrats on the solid quarter and a great Start to the new fiscal year. I wanted to get a little more color on the sources of growth across the product portfolio. If you could give us sort of the scorecard, if you will, across observability, across database, across service management and also the maintenance subscription, which of those four areas sort of drove strength in the quarter and which of these sort of came in line or weaker than expected?

Speaker 2

Sanjit, thanks for the question. This is Sudhakar. As I noted in the script, We continue to see the benefits of our focus on subscription transition across the board. In terms of specific businessesproduct lines, we saw growth in all three of the major ones that I Keep highlighting which is observability, service management and the database portions. As I have mentioned previously, While we are highlighting those as 3 broad market opportunities for us, they're also interrelated for us, especially as we evolve our SolarWinds platform because of the integrated value that we are delivering to customers.

Speaker 5

That makes sense. And then I guess a similar question. When I look at the results, the 100 ks customer adds were quite strong. You did 5% revenue growth and yet you're sort of being prudently cautious in terms of the full year guidance. When you look at the different segments, enterprise, mid market, commercial, what are the trend lines you're seeing there in your SMB base versus your enterprise customer base?

Speaker 2

Absolutely. Sanjit, as you heard from Bart, we did increase The full year guidance for EBITDA based on the strength of our Q1 performance and our continued focus on both top line growth and operating discipline. The way I would address your question is the pipeline for us across all the segments that you mentioned is increasing. At the same time, as you can imagine, the larger segment or the enterprise segment, there'll be a little bit more of a scrutiny from a budget and a budget allocation standpoint. And so the timing of those deals is a bit more variable than let's say in the mid market segment where the velocity motion that we have established over the years comes in really, really handy.

Speaker 2

That plus the diversified customer base that we have gives us a better foundation to build upon.

Speaker 3

But Sanjay, we did have a noticeable improvement in our the number of deals that we have That are greater than 50 ks. As you mentioned, the number of deals or number of customers who have spent more than 100 ks with Did increase noticeably in the Q1. Not going to say that we're going to have that kind of increase every quarter, but it's just Some of the efforts that we've done on the moving upmarket are starting to pay off.

Operator

Thank you. Your next question comes from the line of Matthew Hedberg. Please go ahead.

Speaker 6

Hey, guys. This is Simran on for Matt Hedberg. Thanks for taking our question. So just to start off, as you continue to focus on Mobility. Can you just talk a little bit more about the progress and the adoption of your hybrid solutions?

Speaker 6

And if you have any incremental next steps for this year?

Speaker 2

Absolutely. We are seeing a strong adoption of our hybrid cloud observability Solutions. As we highlighted, we launched that solution in earnest in April of last year with continuing capabilities being added in July October of last year. What I can say is that it becomes part of our primary motion in the Americas and we still see a lot of opportunity to create a flywheel effect in EMEA and APJ as the year progresses. So as we see it, there is a lot of opportunity ahead of us.

Speaker 2

And as much progress as we have made, We still believe we are in early stages of the transition.

Operator

Thank you. Your next question comes from the line of Oliver Robert. Please go ahead.

Speaker 7

Great. Thanks guys. Good morning. They slipped my name, Rob Oliver from Baird. And apologize for my voice.

Speaker 7

Sudhakar, a question for you on Fed and then Bart, I had a follow-up for you. Obviously, very big Fed spend tailwinds right now. And You guys traditionally very strong position at Fed and over the last few years you've done nothing really You're in rebuilding a lot of those relationships. Where are you guys now relative to Fed and where you want to be in terms of renewal rates and And positioning relative to the kind of September Fed fiscal year end?

Speaker 2

Sure. Rob, thanks again for the question. Hope you feel better. First things first, we have generally highlighted our largest customer in the federal space, which became a subscription customer of ours last year. What I can highlight is that they renewed again this year, reinforcing their belief in our solution set.

Speaker 2

And as you can imagine, that's subscription business, not just a maintenance renewal. Additionally, we continue to expand our relationships with federal customers and had a strong Fed quarter as well in Q1, Both in terms of number of deals as well as the size of deals in many cases. As you highlighted, our team has done Yeoman service in the federal sector and we continue to do it. The broader public sector is a strong area for us and our solutions resonate there and will continue to be a focus for us as we get into the federal buying season in both 2023 as well as into the future.

Operator

Thank you. Your next question comes from the line of Erik Suppiger. Please go ahead.

Speaker 8

Yes, thanks for taking the question. First off, As you convert customers from subscription or from maintenance to subscription, can you talk a little bit about what that conversion ratio Has been you said it was greater than 1 to 1. Do you have a range of what kind of expansion you're seeing there? And is can you tell us if your conversion to subscription, is that moving faster than you had projected? I'd be interested to know how it is relative to expectations.

Speaker 8

Then lastly, you said that you're looking at further expense cuts. What actions are you looking at taking to further reduce costs?

Speaker 3

So yes, Eric, from a conversion standpoint, in the Q1, the conversion rate from maintenance to subscription was closer to 1.8 for us. So still well above the 1.2, 1.3 that Most folks convert their maintenance base at, and well above our expectations. We are still fairly early on. So We don't expect to continue to convert at the 1.8 level. So that is better than what we expect and what we've modeled.

Speaker 3

As far as the number of customers and the adoption rate, I will tell you it's generally in line, but maybe slightly ahead. We have an expectation. We're not pushing customers hard. We want customers to convert on their own timelines. We're not we don't want to push for it, meaning that we don't want to sacrifice future revenue just to get a customer converted from maintenance to subscription.

Speaker 3

So we're slow and steady across the board as far as getting our maintenance base to move over to subscription revenue. And as far as the expense cuts, we talked about the actions we took in the Q1. Anything after that to be honest with you Rob is just going to be Prudent expense management, meaning that we'll continue to hire, but it will be very selective hiring, Replacement of quota carrying reps and things like that. But from an investment standpoint, we think the investments that we made in 2021 2022 are starting to pay off. Now it's time for us to step back and watch the dividends, watch reap the dividends that we're seeing from the investments that we made over the Couple of years is the way we

Operator

view it. Thank you. Your next question comes from the line of Terry Tillman. Please go ahead.

Speaker 9

Great. Thanks. Good morning, guys. This is Conor Casarello on for Terry. Thanks for taking my question.

Speaker 9

Just wanted to touch on partners. So sounds like there's good traction stemming from the updated partner strategy so far. I just wanted to double click on maybe where you're seeing momentum with partners in terms of reaching more customers and maybe what you're hearing from them on adoption as well as any advantages you've seen around the co selling motions you have in place with AWS and Azure?

Speaker 2

Sure, Papan. With regards to partners, I highlighted both call it the traditional partners through our Transform Partner Program as well as some of the more recent additions that we made with Global System Integrators and such. The way to think about it is our More focused traditional partners continue to help us expand geographic and customer footprint, but predominantly in the mid market. And the GSI partners are focused a lot more on the larger enterprise, which required, as you know, in a traditional company, a lot more feet on the street. But given our model, we felt it was more appropriate to work with the GSIs, enable them and continue to manage a lower cost of sales.

Speaker 2

So that's how we scale, but do so efficiently from an expense standpoint as well. Now coming to AWS and Azure, Those relationships continue. We have some very strong co sell motions established with them pretty much across the entire portfolio. But that being said, I would say in terms of partnership life cycle, they are still earlier in the life cycle than more mature in the life cycle, representing a larger opportunity for us on a go forward basis.

Operator

Thank you. Our next question comes from the line of Jacob Staff. Please go ahead.

Speaker 10

Hey guys, this is Jacob on for Kash. Overall, it looks like a very good quarter, so congrats on that. A couple of things I wanted to touch on is, I believe it was mentioned in the prepared remarks that you've been able to win larger deals and that's evidenced by the increase in 100 ks customers in the last year. Are you able to quantify how much larger these deals that you're landing are? And then On top of that, maybe touch on win rates that you're seeing against maybe some more cloud native competition.

Speaker 10

Any color on that would be really appreciated.

Speaker 2

Sounds good, Jacob. We will continue representing the 100 ks and above size deals that Bart highlighted in his script on a go forward basis as an indication to you of the types of deals that we are winning. These are not necessarily large customers, although we are winning a lot of large customers as well. But when you think about why our trailing 12 months with many customers is growing, that's because we are helping them consolidate Their environment, there's a lot of tools sprawl that happens in customer environments and we're helping them consolidate because we have the most comprehensive set of solutions. That's another trend that I would suggest that we keep in focus as the industry evolves and as customers look to simplify their complex environments, manage their cost and improve their productivity.

Speaker 2

In terms of cloud native or broadly speaking competition, we feel very good about our competitive position. If you take each one of our segments, Let me start in reverse order almost this time with regards to our database monitoring products. It's a different set of competitors, but Based on everything that we are seeing in the market, we have incredibly compelling solution that we believe will help customers of all sizes and especially in the larger enterprises as well. The service management solutions are ideally suited for mid market And we continue to expand that ecosystem and we've had our share of competitive wins there as well. And on observability, the uniqueness that we have is We are enabling customers to evolve from their premises based solutions to SaaS and cloud native solutions or as their business needs indicate or dictate rather than imposing a particular model on them.

Speaker 2

And that is coming in particularly handy in this environment where customers are questioning and scrutinizing their cloud costs as it relates to efficiency and total cost of ownership.

Operator

Thank you. Your next question comes from the line of Boston, Massachusetts. Please go ahead.

Speaker 9

Hi, can

Operator

you hear me okay?

Speaker 6

Yes.

Speaker 4

Okay, great. John Dessauer here. Question for you regarding an inflection point say at revenue recognition. Meaning if you as you convert maintenance And you're no longer selling PERC licenses to SaaS from here, okay. Assuming no pickup and attrition rates across your customer set, Will you sort of see the same start to see increases sequentially in revenue assuming Q1 trends you just observed continue moving forward?

Speaker 3

So yes, to answer the question, we still have we talked about the subscription transitioning Subscription transition being multifaceted. And in regards to that, when we convert a maintenance customer to An on prem hybrid cloud observability product. There is an upfront component to that subscription revenue. And then when we talk about the SWO product Offering, that's our SaaS offering. That subscription revenue will be fully pro rata.

Speaker 3

So there's a little bit of a mix In our subscription revenue between those two models, it's why we both it's why we disclosed what our subscription ARR is, just because we think that is More indicative of what the overall trend is going to be from a subscription standpoint, because we do get some upfront component to the subscription revenue when it's an on prem Subscription.

Operator

Thank you. Your next question comes from the line of Erik Suppiger. Please go ahead.

Speaker 8

Yes. I just wanted to check, Bart, what have interest rates on the debt Moved around much and what interest expense are you expecting for this year?

Speaker 1

Hi, Erik. This is Tim. We aren't expecting much change compared to what we discussed in Q1 in terms of models. Even though rates Moved slightly. We're still in the same vicinity.

Operator

Thank you. Your next question comes again from the line of Boston, Massachusetts. Please go ahead.

Speaker 4

Thanks. John Dethauer again. I guess when you think about you understand your commentary on efficiencies that you give your customers from your offerings. But if you think about the customers you signed in Q1 of this year, was that the result of 2022 buying decisions? Were those made more a part of their 2023 budgeting processes, again

Speaker 2

by your customers?

Speaker 4

How would you think about that conversion in terms of where the demand driver was From 2022 budget decisions or customers deciding their 2023 spend?

Speaker 2

It's a combination, I would say. If you look at The foundations of our business, the velocity that we have with how we generate pipeline and how we close pipeline is In many cases, we closed within the quarter boundary. And so you can attribute a lot of that from a 2023 budgeting cycle standpoint. Equally, we generate pipe in previous quarters as well. And in some cases, like I mentioned, customers have taken a wait and see approach.

Speaker 2

And so there's always going to be some spillover from 1 quarter to another, just like there will be spillover from Q1 to Q2. And so we keep count of every one of those and close those out. So it's going to be a mixed bag, so to speak, in terms of 2022 spillover to 2023 budgets. Another indication I'll give you there is that the overall pipe in the business continues to grow and it's important to keep it growing in that direction, especially given the Overall macro conditions where some customers may take a wait and see approach and even when they do, how do we deliver predictable growth is our focus.

Operator

Thank you. There are no further questions at this time. I'll now turn the call back over to, excuse me, Tim Khuraja, GVP of Finance and the management team.

Speaker 2

Thanks all. Thank you again. Tim is here with me as is Bart. I appreciate everyone's attention, focus and support of SolarWinds.

Operator

This concludes today's conference call. You may now disconnect.

Earnings Conference Call
SolarWinds Q1 2023
00:00 / 00:00