SolarWinds Corporation

Good day and thank you for standing by. Welcome to the SolarWinds first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Howard Ma, Senior Director of Investor Relations. Please go ahead.

Thank you, Summer. Good morning, everyone, and welcome to SolarWinds' first quarter 2021 earnings call. With me today are Sudhakar Ramakrishna, our President and CEO, Mark Halsu, our EVP and Chief Financial Officer, and John Paliuga, EVP and President of Enable. Following prepared remarks, we'll have a brief question and answer session. This call is being simultaneously webcast on our investor relations website at investors.solarwinds.com. On our investor relations website, 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, the impact of the cyber incident on our business, our market opportunities, the impact of the global economic environment on our business, and the updates of the potential spinoff of our naval business. 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 also subject to a number of risks and uncertainties, including the numerous risks related to the cyber incident and the potential spinoff of our Enable business. Additional information concerning these statements and the risks and uncertainties associated with them is highlighted in today's earnings release and in our filings with the SEC. Copies are available from the SEC or on our investor relations website. Furthermore, 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 the non-GAAP financial measures. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call are available in our earnings press release and summary slide deck on the investor relations page of our website. And with that, I will now turn the call over to Sudhakar.

Thank you, Mohit. Good morning, everyone, and thank you for joining us today. I hope you're doing well and staying safe. I want to start by first thanking our employees, customers, partners, and our shareholders for their ongoing commitment to and for their support of SolarWinds. I've completed my first full quarter at SolarWinds, and I'm energized and inspired as I witnessed firsthand the tremendous dedication that our employees have to customer success, the competence, commitment, and attitude displayed to execute on our Secure by Design initiatives and to deliver demonstrable results, the commitment and trust our customers and partners place in us, something we deeply cherish and do not take for granted as we accelerate our journey to help them transform faster in an increasingly hybrid IT world. I continue to spend a lot of my time with our employees, customers, and partners. Whereas the conversations earlier in the quarter were largely about the cyber incident itself and what happened, increasingly the conversations are much more focused on what have we learned and how can we apply what we have learned to ensure the safety of our environment and those of our customers. In this regard, our secure by design initiatives are enabling us to have broader conversations with customers, thereby bolstering our relevance to them even further. I'll expand on this in a minute. With respect to the cyber incident, we are also coming to the end of our investigation, and we continue to provide updates as we conclude them. I will now touch on a few financial and operational highlights in Q1. Our teams did an excellent job of maintaining focus on delivering customer success. Our partners played a pivotal role as we executed the Orion Assistance Program in support of our customers. For the first quarter, we delivered revenues well above the high end of the range of our outlook with a total non-GAAP revenue ending the quarter at $257 million, representing year-over-year growth of 33%. First quarter adjusted EBITDA was $106.5 million, representing an adjusted EBITDA margin of 41%, exceeding the high end of our outlook for the first quarter. Our Q1 Core IT Management maintenance renewal rate of 87% is higher than the low to mid-80% renewal rate we noted we expected in 2021 when we discussed our full year results in February. We continue to focus on customer retention as a key priority and hope to grow back to our historical and best-in-class renewal rates of over 90%. our largest customer renewed with us while also increasing their license count. We've also seen other customers, including those in the federal sector, expand their investments with SolarWinds in the first quarter. We see these wins as validation of our team's proactive and sustained efforts to deliver industry-leading solutions that are not only powerful and affordable, but also secure. Our enabled business again delivered double-digit, 13th-cent revenue growth in Q1, and we continue to expand our portfolio in support of our MSP partners and SME customers. Given the potential spinoff of this business, John Paliuca will provide a business update on this call. We are accelerating our momentum in the database monitoring segment with the formation of a dedicated core team to help us capture what we believe is a large and growing market opportunity of over $6 billion. We were recognized by Gartner in the magic quadrant for application performance monitoring, another pillar of future growth potential for us, alongside our database monitoring business. We expanded our offerings in Q1 as we continue to evolve to a full-stack observability company that helps accelerate the digital transformation needs of our customers via an integrated platform with automation, monitoring, alerting, and remediation capabilities, leveraging AI ML techniques on a unified cloud platform to support hybrid IT deployments. we expanded our management team with the appointment of Andrea Webb as our Chief Customer Officer, Tim Brown as our Chief Information and Security Officer, and Rohini Kasturi as our Chief Product Officer. Additionally, Jason Bliss assumed the role of Chief Administrative Officer, integrating the corporate functions of HR, corporate development, legal, and IT. In addition, we added key management members to the Enable business, including a chief technology and product officer, a general counsel, chief customer officer, and chief people officer, as Enable prepares to operate on a standalone basis. Now, let me turn to an update on our Secure by Design initiative. The recent cyber incident against SolarWinds, other widely used technology providers, and our and their customers is a concerning new reality for the software industry. This represents the increasingly novel and sophisticated action used by outside nation states on the supply chains and infrastructure on which we all rely and illustrates the need for the industry and public sector to work together to share real-time information. SolarWinds is committed to sharing our learnings about this attack broadly given the common development practices in the industry and our belief that transparency and cooperation are our industry's best tools to help prevent and protect against future attacks. And we see an opportunity to help the industry to help lead an industry-wide effort that we believe will position Perlevance as a model for a secure software environment, development processes, and products. In fact, this is increasingly the topic of discussion as I engage more closely with our customers and partners. Over the past three months, our IT, product, and development teams have been committed to implementing a series of actions that are designed to further enhance the security of our environment and systems against attacks, including adopting least privileged access mechanisms and addressing further potential risks associated with third-party application access. We also recognize that our security posture and procedures are dependent on the people at SolarWinds. So we are investing in additional rigorous security training for our employees. Our initiatives continue to resonate well with customers and partners, and it is my goal to proliferate them as broadly as possible. We see these initiatives and investments as being consistent with our goal of being a best-in-class provider of powerful, affordable, and secure solutions. Now let me turn the call over to John to provide an update on the Enable business. Done?

Thank you, Sir Tucker. I'll spend the next five minutes giving an update on the Enable business and first quarter performance. I'm excited to announce that in Q1, we completed the rebrand of Enable across our platform solutions, new website, and partner community sites. Also, on April 14th, we held the analyst day for equity analysis. I want to start by recapping some key points from that presentation. First, the market opportunity for Enable starts with small and medium enterprise IT spending, which is over a trillion dollars globally and growing. SMEs deal with nearly as much IT complexity as larger enterprises, but IT management and security are not the core competencies of most SMEs. As a result, SMEs have increasingly turned to MSPs to be their trusted partner through their digital evolution. And in turn, MSPs need technology that can effectively address SME customer needs. Using our purpose-built software platform, MSPs are able to not just build successful service offerings, but also play an increasingly important role in shaping SME IT spending decisions. We believe the market opportunity for our software solutions is approximately $23 billion, and expect it to nearly double by 2025. Second, why do we win? We win because we're architects for the MSP to enable them to effectively scale their businesses and our purpose built across three pillars. The first is our monitoring breadth and depth, which has always been a strength of both Enable and SolarWinds. Our MSP partners that live in our platform day in and day out rely on the centralized view and alerts we provide on hundreds of thousands of different end customer environments and devices. In Q1, we expanded our monitoring depth. We went GA with our Microsoft Intune integrations. allowing MSP partners to perform in-tune device management functions directly with the enabled platform. We also extended our iOS device coverage to map workstations, adding remote access capabilities into additional types of network devices. Our second area of strength is our data protection and security solutions, which are fully cloud-based and seamlessly delivered via our RMM platform and give our MSP partners a truly layered approach to protecting their customers. In addition, because our platform gives our partners access into end customer environments, the security of our platform is extremely important. In light of the Secure by Design initiatives that Sudhakar has discussed in detail, we have and continue to implement end product security enhancements to our enabled products, such as multi-factor authentication, single sign-on, and SSH for network devices. Third. we offer what we believe are best-in-class partner success resources that train our partners on how to improve technician efficiency, build stronger books of business, and become better business operators. This helps drive retention and expansion on our platform. We look forward to hosting our Global Empower event later this quarter and the discussions we'll have with our partners on industry trends and how to solve the challenges they face. As we strive to become a standalone Rule 50 company with a heavier lean towards growth following the potential spin-off transaction. I want to highlight a unique aspect of our growth model called partner-enabled expansion. We grow when we add new MSP partners and help our MSP partners grow. That's the fuel that propels the model. After landing a partner, we grow when the partner adds new technicians that use our sell-to solutions. More significantly, we grow when the partners add new SME customers And when those SMEs add employees and devices under management, we grow again when our MSPs deliver additional solutions powered by our platform. This is the power of our sell-through model and also the biggest driver of our net retention rate. Through this partner-enabled activity, our partners essentially act as an extension of our sales force. Turning to enable Q1 performance, we delivered a solid 13% total revenue growth and 15% subscription revenue growth, especially considering a couple of headwinds worth noting. First, after the cyber incident in December, we slowed our demand generation and sales activity, which impacted new partner additions and expansions in January and February, before returning to more normalized levels in March. Second, the continuing impact from COVID, which we began to experience during Q2 of last year, remains a modest year-over-year headline, although the impact on our subscription revenue growth rates has continued to improve since the initial deceleration in Q2 of last year. Looking ahead, we're cautiously optimistic of unimproving conditions for the balance of 2021. As we provided in the analyst day presentation, our outlook for renewable revenue growth is approximately 14% in Q2, an improvement over Q1, and 12% to 14% growth for the full year, assuming the spin occurs over the coming months. We are making investments for growth in R&D, international go-to-market, and partner success that we believe will position us for growth acceleration as we exit 2021. We remain excited about the plans submitted and enabled, which we are still targeting to complete over the coming months. With that, I'll turn it over to Mark to provide more details on our financial performance and outlook. Thanks, John, and thanks again to everyone joining us on today's call. Our first quarter financial results reflect solid execution while demonstrating the resiliency and sustainability of our model. We had a much better quarter than anticipated and finished well above the high end of the range of our outlook for the first quarter with total non-gap revenue ending the quarter at $257 million, representing year-over-year growth of over 3%. Total enable revenue was $83 million, representing growth of 13%. John just talked about what is driving that piece of our business. and total core IT management revenue was $174 million. Total license and maintenance revenue was $147.9 million in the first quarter, down 3.5% versus the prior year. Maintenance revenue was $123 million in the first quarter, up 6% versus the prior year. We typically disclose the maintenance renewal rate for our perpetual license products on a trailing 12-month basis. Our Q1 trailing 12-month rate was 91%. However, given the heightened focus on smaller windows of performance since the cyber incident, we want to provide the end quarter renewal rate for Q1, which was approximately 87%. This exceeded our expectations for renewal rates in the low to mid 80% range throughout 2021, which we provided on our last earnings call. In addition, we expect this renewal rate of 87% to increase by a few percentage points based on historical trends after factoring in renewals of expired bookings that occur post-quarter end. For the first quarter, license revenue was $24.9 million, which represents a decline of approximately 33% as compared to the first quarter of 2020. The decline in license revenue is a result of the combination of the impact of the cyber incident, the continuing impact of the COVID-19 pandemic, and our continued evolution to subscription sales for our on-premises products. our on-premises subscription sales resulted in approximately two percentage point headwinds to our license revenue for the quarter. That said, we believe that the first quarter should be the most negatively impacted as it relates to the year-over-year growth. We substantially halted our demand gen activities from December through the early parts of the first quarter as we focused our efforts on assisting customers. We believe this negatively impacted our new license bookings in the first quarter and in the early portion of the quarter in particular. We saw acceleration in our business as we moved through the first quarter, and we are working to continue that trend as we move through the rest of the year. Looking ahead, we expect to continue to have near-term headwinds on our business. Total ARR reached approximately $961 million as of March 31, reflecting year-over-year growth of 12%. Subscription ARR grew 13%, reaching $438 million at the end of the quarter. Moving to our subscription revenue, first quarter non-GAAP subscription revenue was $109.1 million, up 15% year-over-year, which was driven by enabled 15% year-over-year subscription revenue growth, as well as solid performance in core IT management subscription revenue. Our land expand and retain model has successfully driven sustained growth in our customer relationships. We finished the first quarter of 2021 with 1,074 customers that have spent more than $100,000 with us in the last 12 months, which is a 16% improvement over the previous year and 17 more since year end. We are continuing our efforts to build larger relationships with our enterprise customers. We also had a solid quarter of non-GAAP profitability in the first quarter. First quarter adjusted EBITDA was $106.5 million, representing an adjusted EBITDA margin of 41%. exceeding the high end of the outlook for the first quarter. Unlevered free cash flow for the first quarter totaled $51 million. Excluded from EBITDA and unlevered free cash flow are one-time costs of approximately $20 million, including $10 million of spinoff-related costs and $10 million of cyber-related remediation, containment, investigation, and professional fees net of insurance proceeds. I do want to clarify that these cyber-related costs, not included in the Just Ziva doc, are one-time and non-recurring. They are separate and distinct from the $20 to $25 million of secure by design initiatives, which are aimed at enhancing our IT security and supply chain process. These costs will be part of our recurring cost structure on a go-forward basis. We expect one-time cyber-related costs to fluctuate in future quarters, but to be less in future periods than the amount incurred in the first quarter. These one-time cyber costs are, however, difficult to predict. They not only include the significant cost of the forensic investigation efforts that we are expecting to conclude in the near future, but also costs associated with our ongoing litigation, government investigations, and potential judgments or fines in related professional fees. We expect our insurance coverage to offset a portion of these expenses. We expect our one-time spin-related costs to subside following the completion of the spin-off, which we are targeting complete in the coming months. Net leverage at March 31 was 3.2 times our trailing 12-month adjusted EBITDA. With $374.4 million in cash at March 31, we believe we are well-positioned from a financial standpoint to continue to invest in the future growth of our business. I will now walk you through our outlook before turning it over to Sadaka for some final thoughts. While ongoing customer renewals and pipeline growth are indicators of the health of our business, There is still enough uncertainty around the impact of the cyber incident on top of the continuing impact from the global pandemic that we feel it's still too early to predict a range of outcomes with the level of precision that we have provided in the past. As such, we believe it is prudent to only provide second quarter of 2021 outlook for total revenue, adjusted EBITDA, and earnings per share. For the second quarter of 2021, we expect total non-GAAP revenue to be in the range of $254 to $258 million. representing year-over-year growth of 3% to 5%. Adjusted EBITDA for the second quarter is expected to be $102 to $104 million, which implies an approximately 40% adjusted EBITDA margin. As a reminder, our adjusted EBITDA margin is being impacted by the incremental spending associated with the Secure by Design initiative that we began implementing in the first quarter, as well as the growth initiatives that John and the Enable team were executing in anticipation of the potential spinoff. Non-GAAP fully diluted earnings per share is projected to be 21 cents per share, assuming an estimated 319.6 million fully diluted shares outstanding. And last, our outlook for the second quarter assumes a non-GAAP tax rate of 22%, and we expect to pay approximately $22 million in cash taxes during the second quarter of 2021. While we are not providing consolidated four-year outlook, I will say that we continue to expect license performance to improve versus Q1, as we move through the year in all regions. Based on what we've seen so far in the first quarter, we expect that maintenance renewal rates will be in the mid-80s for the rest of 2021, and we are targeting to return to historical performance in 2022 as we work with our customers to ensure their security and success, and as we continue to further enhance our product portfolio. Increasing the percentage of our recurring revenue has been a focus over the past five years, and recurring revenue is now at 90% of our total revenue. We intend to continue to expand the subscription offerings of our on-premises products in 2021 and make new subscription sales a priority with our sales teams. And finally, with respect to our conversion of adjusted EBITDA to free cash flow, our rate for the first quarter was well below our historical trend. The conversion rate was negatively impacted by lower license and maintenance renewal bookings. The ongoing revenue makes shift to more subscriptions. as well as annual bonus payments, which are seasonally higher than the first quarter. We expect our conversion rate for the full year to be above 70% and grow to the low 80% range in 2022. With that, I will turn the call back over to Sudhakar for his closing remarks.

Thank you, Bob. Our team's competence, commitment, and attitude was evident as we delivered a strong Q1 performance and delivered results exceeding our outlook in both revenue and EBITDA. I'm confident that our continued focus on customer success will make us even more relevant as we evolve our platforms and serve the evolving hybrid IT needs of our customers. We expect to enable IT ops, DevOps, and SecOps professionals to have integrated experiences across automation, and configuration, monitoring, visibility, alerting, and remediation. These moves will further accelerate our progress towards a greater mix of subscription and recurring revenues. For the remainder of 2021, our focus will continue to be on executing on the initiatives that I outlined during our Q4 earnings call, focusing on customer retention and demonstrating ongoing progress in subscription, license and maintenance growth across all geographies and sectors. I'll conclude by again thanking our employees, partners, and customers for their commitment to and support of SolarWinds. We hope to continue to demonstrate progress in customer retention, license and maintenance growth, and accelerating our progress along the strategic and portfolio dimensions to support the growing needs of our customers. John, Bart, and I will now be happy to address your questions.

Operator, we are ready for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. The first question comes from Matt Hedberg of RBC Capital Markets.

Hey, good morning, guys. Thanks for taking my questions. So, Doctor, I wanted to start with you. Now, we do have some distance now between the breach and where we are today. I wanted to dig into a little bit about both the renewal and the new business side. Obviously, 87% in quarter renewals were really nice to hear, given what expectations were coming into the year. But, you know, are you hearing any customers, both existing or potentially new customers, that are unwilling to look at SolarWinds products now following the breach? Just a bit more detail on that would be helpful.

Sure, Matt. As I mentioned in my prepared remarks, I spend a lot of time with customers across geographies as well as various sectors and sizes. The way I would describe it is that customers definitely want to understand what happened. And like I mentioned earlier in the quarter, a lot of the questions were around what happened with the security incident. Now I would say there's a level of curiosity that customers appreciate that what happened from a security breach standpoint to us could happen not just to them, but also see a lot more of the vendors coming out and speaking about breaches that are going on in their environments, including some very large vendors, as you know. So that doesn't become the main topic of discussion and instead it's about the portfolio, the value proposition and things like that. So I haven't seen examples of customers saying that they don't want to evaluate us. In fact, I would say that more and more of them are doing so and increasingly what I find is that we are having broader conversations. So whereas previously we may have had a discussion with, let's say, a networking engineer, now we are having discussions with the CIOs and the CISOs. So that gives us the opportunity to have more relevant and more strategic conversations with them.

Got it. That makes a lot of sense. Super helpful. And then Bart, You didn't provide a full-year outlook, but you did give us some detail on some incremental cyber costs. Are there any other puts and takes that we should be thinking about? I guess I'm thinking specifically on the margin side as we move throughout this year. Yeah, you know, Q1 EBITDA margin was a little over what we'd originally expected, Matt. And so I think it came in close to like 41%. We still have some headwinds that we're facing in the second quarter. If you look back at our historical performance, margins tend to rise in the back half of the year. A lot of that is because of the increase in revenue in the second half of the year for us. We don't like to talk about seasonality, but Q3 and Q4 are typically better quarters for us from a license revenue standpoint. And if that's the case this year, then we would expect our margins to improve in the back half of the year as well. Got it. Thanks a lot, guys. Thank you, Matt.

The next question comes from Sterling Audie with J.P. Morgan.

Yeah, thanks. Hi, guys. So the incremental costs that you're incurring for security operations, et cetera, you mentioned. So the portion that you mentioned that will need to continue, which is understandable. I'm just curious, is there going to be leverage in that level of spend? Meaning, is this the level that you will need to maintain? Or is there a variable component that will grow over time and maybe permanently impair margins to some degree? Yeah, Sterling, you know, really the 20 to 25, it's not going to scale, you know, with our revenue. You know, it's fairly stagnant as far as what the costs are going to be on a go-forward basis. There's a few things that are like penetration testing and a few things like that that are in that 20 to 25 number that may increase slightly as our customer base increases, as our IT footprint increases over time. But it's not going to scale with the rest of our business.

Great.

And then when you look at the improvement in new customer or new purchases, are there particular parts of the product line that are rebounding first? And is there anything within the product line that you're finding still lagging because of kind of hangovers from the breach? You know, from a product standpoint, Sterling, we thought, you know, the light where you would see that is in our license revenue. And, you know, obviously we talked about the first quarter being our toughest quarter in 2021. And really it was pretty much across the board as far as what was down year over year. Obviously, you know, the Orion product portfolio was the most scrutinized. But from a product standpoint, it was really just across the board. Got it. Thank you.

The next question comes from Rob Oliver of Bayard.

Great. Thank you. Good morning, guys. Two questions. but the doctor for bart but just uh... but uh... a little bit on the floor like this growth at this quarter maintenance obviously on they did pick up apart you had said in the prepared remarks that but you were making priority making a description of priority for the sales team. So just wondering, as you guys approach customers on renewals, I know the goal has not been to convert folks to subscription, but have there been some changes, you know, Sudhakar, since maybe your arrival, about the approach to subscription, and has that proved to be, you know, a bit of a easing, perhaps, some of the the barriers perhaps to renewal with some of your customers, and is that happening in core IT as well as in the SAS portfolio? And then I had one follow-up for John. Hey, Rob. First and foremost, you know, as you said, you know, for our existing customers, the maintenance, renewal is more attractive from a financial standpoint. So we're not seeing a hard shift of our existing customer base to go from maintenance to subscription. The subscription sales of our on-premise products are all to new customers, and that's still the case today. What we have done is starting with our database product portfolio of products. We're making that a priority from a subscription sales standpoint. As we move harder into that market, especially with the Century One acquisition, we're making that our initial on-premise subscription product that we're focusing the most on. And really, as we move into the second half of the year, I think that's one of the areas that Sudhakar may make a priority for us. Sudhakar? Absolutely.

Just to be close on that point, We don't want to make unnatural moves, so to speak, on that front. And there are some very logical opportunities for us to translate more and more into subscription, as Bart mentioned, specifically with a database portfolio. And as we explore additional packaging options and integration options for our portfolio in the back half of the year. But most of those progress indicators are a function of delivering more functionality and value to customers, and then in that context, also offering a greater leaning towards subscription. Even as we train more of our sellers in that context, we do have additional incentives for our sales teams to sell subscription, and that is something that we continue to amplify.

Okay, great. That's really helpful. Thank you, guys. And then, John, I had one follow-up for you. You know, just a couple weeks here removed from the Southside event that you guys did, and really appreciate all the color. I know there were some puts and takes, at least from the balance community, around kind of a profitability profile versus growth. It does sound, you know, particularly given that Pam – expansion here, I think, doubling through 2025, like there is, you know, meaningful growth opportunity along with, I think, as you guys said, you know, desire to be a Rule of 50 company. You know, just stepping back now, could you maybe just, you know, kind of frame how you're thinking about that, you know, obviously without, you know, providing any specifics you can't, but how you're thinking about that kind of growth and the version of investment profile and if there's, you know, any change in recent weeks as things, I know, start to get a little bit better here emerging from some of the COVID impact. Thanks. Thanks, Rob. As I outlined in the prepared remarks, we're going to continue to increase investment across three areas of R&D, international sales, and customer success. Each of those have a different return horizon. If you think about it, our international sales, we're investing there to land some larger MSPs in other parts of the world and also begin to plant our flag via some of our channel partners. I expect those to have a shorter return. And we're actually starting to see progress in those geographies already. So that will be the shorter return. The second one around customer success, we continue to add resources and technology and processes to help our MSP partners. grow their business, and for them to add services, for them to add customers in a scalable way, that has a little bit more of a medium-term return because we have to help them grow. As they grow, we grow. And then the last one around product, as Sudhakar mentioned, we brought on our new CTPO, Chief Technology Product Officer, and he's looking at a bunch of different ways for us to improve the scalability of our platform but also how to add services to help these MSPs at a little bit of a faster clip. So as you think about it from a product strategy point of view, we have two. One is we're going to continue to expand our service area on things that we can monitor, and we demonstrated that at this quarter with the adding of the Intune integration. And the second one is adding services for these MSPs to protect SMEs and to do their jobs more efficiently. That one takes a little bit more time because, of course, we have to develop and build them into our platform, make them MSP-ready, and then that cohort for that service begins to add. So those are the three areas with, I'd say, slightly different China horizons for each one. Okay, great. That's really good detail. Appreciate it, John. Thank you guys very much.

Your next question comes from Kingsley Crane of Barenberg Capital Management.

Great. Thank you. It's great to see continued traction in the database management portion. Could you tell us a little bit more about the creation of this dedicated team and what other teams from within the business these team members may be coming from?

Yes. So I was very specific in calling a core team. So the idea here is not so much to hive off from the functional teams. We have organized functionally across the board because we want to create a lot more leverage, let's say in product development and marketing and all the functions that we have. However, what we've done is that we have appointed a a core team leader, Bob Potter, and in a sense built a cross-functional virtual team that is focused essentially day-to-day on driving this business. So in many ways, we preserve the integrity of our functional team, but also create the focus of a core team. So that's the idea behind this particular initiative. And this is a very scalable model from my experience.

Okay, I appreciate that. That's very helpful. And then one for John, that's very positive commentary on the growth drivers of Enable. I just wanted to touch on the growth outlook that you provided at the most recent analyst day. So if we look at the results with 13% growth in Q1 with the month of pause demand generation, the 14% growth implied by the guidance for Q2, and then the 12 to 14% growth for the full year. I guess what should we make of the guidance and what it implies for the back half of the year, and if there's anything else that we should be considering in terms of this growth outlook.

Yeah, and just to remind the audience, so we guided Q2 83.5 to 84 million. That's the 14%. And for the year, we guided 340 to 344. What we're expecting to see – pretty consistent pickup and acceleration throughout the year, I would say, as we go through and get some of the returns from the investment that we continue to go through. So that's how we're thinking about it. We'll continue to invest in some of the products. We expect to hopefully have a couple of new offerings soon. that come on that add to the help for our MSPs so that they can begin to add a little bit more in services. We recently announced a DNS filtering offering that will be integrated to our platform. And those types of investments you'll continue to see with the hope that we'll begin to get some return for both us and our MSPs.

Okay. Thank you so much. And congrats on your great quarter.

Thanks, Julie.

Your next question comes from Eric Sepager of JMP Securities.

Yeah, thanks for taking the question. I think you had mentioned during your comments about one-time costs, if there were some liability costs, what liabilities do you have for the breach or what are the judgments and fines that you're anticipating? And then secondly, can you comment about the performance of your observability products? I think those were kind of slow to get started a year or so ago. I'm just wondering how that's performing in the market these days.

Hey, Eric, you were kind of fading out there at the end, but the first question as it relates to the liabilities, as of March 31st, we don't have anything recorded from a liability standpoint as it relates to the cyber incident. You know, we're fairly early on in the process of the investigation, and as of right now, there's nothing that we've accrued at this point. And I think your second question, if you could repeat that, I think it was something around our observability products.

Yeah, the observability products were slow to start, I think, if you go back a year or so ago. And I'm just wondering if those are starting to pick up for you, or how do you look at the competitive environment vis-a-vis like Datadog or New Relic or Dynatrace?

So, yeah, on the description revenue side for the core IT piece of our business, yeah, we are still evolving that product portfolio. You know, we're still moving into that space. That is obviously going to be a priority for us in the back half of the year. That's one of the things that we're going to focus on. So, you know, in 2020, the back half of 2020 and into 2021, a lot of our focus has been on the spin of the Enable business. And the observability products, Eric, is something that we'll talk about in the second half of the year. Probably something that Sadaka and I will make a priority when we have our analyst day later this year as well.

Very good. Thank you.

Thanks, Eric.

Your next question comes from Sanjit Singh.

Hi, guys. This is Melissa Dunn on for Sanjit from Morgan Stanley. Thank you so much for taking the question. So hoping to talk about the network monitoring, so how network monitoring is changing given the shift to cloud and how the Orion platform might need to modernize to address these use cases.

Definitely. So there's a couple of facts that I'll highlight here. While there is definitely a shift to cloud in certain segments, A better way to think about the world is that the world is going to be hybrid for a very long period of time. That's step one. Step two is that even if you think about network monitoring on a premises basis, that is still a growth market, albeit not as fast-growing as, let's say, a pure cloud-only market. So our strategy is to leverage our platform to be able to support the needs of both kinds of deployment. And the way the Orion platform itself is evolving is through the integrated platform that I mentioned, which will not only support monitoring as in network system application and database monitoring, but also be the single platform that supports automation, monitoring, alerting, and then remediation with our service data products. So that's the evolution to think about, and that's what gives us a lot of confidence that we become more relevant to support the growing needs of our customers.

Okay, that's really helpful. And then just last one on my end, as we think about the cloud strategy and going forward within the core IT management side of the business, are there specific areas of investment that you guys are focused on?

A couple of areas. I mentioned the database functionality, and then we spoke about some of the recognition we are getting in the APM space. increasingly the way to think about how we are focusing our investments is on that integrated platform with the integrated functionality across those four dimensions that I discussed. So instead of looking at it product specific, we'll be looking at the broader needs of IT, DevOps, and tech ops professionals.

Got it. Thank you guys so much.

Thanks, Melissa.

The next question comes from .

Yeah, thanks for taking my questions. Maybe for Sudhakar or John, You know, the idea of returning to demand generation activities, I'd be curious if we could focus a little bit more on that because the reality is your sales cycles can move pretty quick, I believe, in both sides of the business, core IT management and enable. So what are some of the early things you're seeing from the return to demand generation activity in terms of the rebuilding of pipeline, et cetera, and how quickly could that get back to kind of normal cadence on demand and related volumes? And then I had a follow-up.

Sure. First, I'll reiterate what Bart highlighted in his prepared comments, which is that our performance throughout the quarter on both sides of the business continued to improve through the quarter. So March was better than February, which was better than January. And that applies to the demand gen engine as well. When the cyber incident hit us, it was pretty much all hands on deck from our side and our partners to essentially help our customers understand the impact. And as you know, the vast majority of our customers were not impacted. But even so, we tried to touch as many customers as we could to make sure that they were safe and secure. So traditional demand gen activities were not the main areas of focus. But then as we started stabilizing things in Q1, we turned our attention to demand gen. And as you know, we have a fairly high velocity demand gen engine. And the way I would describe it is that demand gen is normalizing, although we continue to focus on it from both an investment and activity standpoint. to continue to help it grow because we have growth aspirations on both sides of the business.

Got it. And the second question, and Bart, it was helpful providing that kind of end-quarter renewal rate of 87%. That's great to see.

What I'd be curious, and I don't know who this question's for, the federal sector is a big part of your business. And how has the resiliency been in that sector specifically versus the other industries? And what are you thinking going into the back half of the year where we do have the seasonal strength typically? Thank you. So, yeah, so the 87% that I provided, like I said, we expect that to actually improve a little bit more as we move through Q2, Terry. You know, that includes our federal customers as well. So that's both our commercial and Fed customers. I will say that our Fed business was slightly lower than the number that we're getting there for Q1. But we also talked about the fact that we had our biggest customer renewed in Q1. And we've talked about that deal in the past, and that's a Fed customer as well. So we are seeing engagement with our Fed customers. We are having to work probably a little bit harder with that base, but we are renewing that customer base as well.

And I have been talking to a number of customers, including a disproportionate amount of my time on the selling customer base, given the size and the scope that we have in it. And many of the customers have turned things back on, have renewed to Bart's point, and also continue to expand. We don't really break down specific renewal rates by segment, be it public sector or commercial. So continue to think about us in the blended context, and we'll add commentary as we go.

Thank you.

There are no further questions. I'll turn it back to you for closing remarks.

I think we're done. Thank you, folks.

This concludes today's conference call. Thank you for participating. You may now disconnect.