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spk08: Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the SolarWinds Q2 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Bart Kelsu, Chief Financial Officer. You may begin.
spk07: Thank you, Chris. Good morning, everyone, and welcome to SolarWinds' second quarter 2022 earnings call. With me today is Siddhartha Ramakrishna, our president and CEO. Following prepared remarks, we'll have a 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, our market opportunities, our expectations regarding customer retention, and our evolution to a subscription-first mentality, the impact of the global economic and geopolitical environment on our business, the timing of the phases of our subscription evolution, our gross level of debt, and the impact of the cyber incident and cybersecurity generally on our 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 subject to a number of risks and uncertainties, including the numerous risks and uncertainties highlighted in today's earnings release and in our filings with the SEC. Copies are available from the SEC on our investor relations website. We completed the spinoff of ENABLE on July 19, 2021, and accordingly have included the results of the ENABLE business as discontinued operations for historical periods. Therefore, the financial results presented on this call reflect SolarWinds as a standalone business and do not include any contribution from the ENABLE business. 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. As a reminder, beginning with the first quarter of 2022, we no longer adjust our revenue for the impact of purchase accounting. For the second quarter of 2022, Non-GAAP total revenue is equivalent to our GAAP total revenue. 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 not be final until we file our quarterly report on Form 10-Q. With that, I'll now turn the call over to Sudhakar.
spk00: Thank you, Bart. Good morning, everyone, and thank you for joining us today. I hope you're all doing well and staying safe. As always, I'd like to start by thanking our employees, customers, partners, and our shareholders for their ongoing commitment to SolarWinds. I'm pleased to report the results our team achieved, notwithstanding a tough macro and foreign exchange environment. Our low customer concentration, compelling value proposition, and high-velocity transaction model enable us to operate successfully in any environment and particularly in constrained CapEx environments. As you will notice in our results, our teams made significant strides in improving customer retention to our historical levels, continuing to focus on subscription revenue growth, and evolving to platform-based solutions that we believe offer the best time to value, time to detect issues, and time to resolve issues for our customers in their multi-cloud environments. We had several highlights in the second quarter of 2022. I will touch on some of the highlights before turning it back over to Bart for more color on the quarter, as well as our financial outlook for the third quarter and full year 2022. We delivered revenues of $176 million near the high end of the range of guidance we provided. On a constant currency basis, we would have delivered 2% year-over-year growth. I'm excited to report that in Q2 2022, our in-quarter renewal rates were 93%. a sequential increase over last quarter, and our last 12-month renewal rates are now at 91%. I attribute these results to the commitment of our teams, the relevancy of our solutions, and the trust our customers place in us. We continue to drive a subscription-first mindset and delivered subscription revenue growth of 25% year-over-year. We've been able to achieve this trajectory in a short period of time without impacting total revenue, notwithstanding the fact that transitions to subscription models often come at the expense of revenue growth in the short term. We believe this has distinguished us from other transitions due to the mix of hybrid and SaaS offerings in our current portfolio. We finished the second quarter of 2022 with 879 customers who have spent more than $100,000 with us in the last 12 months, an increase of 13% over the previous year. Increasingly, we are helping customers reduce tool sprawl, create comprehensive visibility across multi-cloud environments, eliminate alert fatigue, and accelerate their digital transformations, leading to larger deal sizes. Adjusted EBITDA was $67 million, representing an adjusted EBITDA margin of 38%, again in line with the outlook we provided. We continue to expand our partnerships with traditional resellers, global system integrators, and hyperscalers. We're increasingly engaged in co-sell and sell-through activities and are winning large deals across our geographies with and through our partners. Our partner ecosystem is a critical part of our go-to-market strategy. We announced the general availability of our hybrid cloud observability solutions. We also released the early access version of our integrated SaaS observability offerings based on the SolarWinds platform to customers initially focused on the DevOps and database communities. We will extend the SolarWinds platform in the coming quarters into other areas, including service management. By integrating observability and service management onto a single platform, we intend to deliver a very unique value proposition to address the automation, observation, visualization, and remediation needs of our customers across IT, Dev, and SecOps communities. Our simple, powerful, and secure solutions built on strong technology and go-to-market foundations are being designed to be easy to try and buy and to give customers best time to value, time to detect issues in their multi-cloud environments, and best time to remediate the issues, thereby saving significant costs and increasing productivity. In Q2, our observability, database, and service management solutions all received multiple industry accolades, I'll mention a few. Gigaohm Cloud Observability Radar Report rated us a fast-moving leader. This is an early recognition of our emerging observability offerings. Three Stevie Awards recognized our innovations in database monitoring and for advancements in the Secure by Design initiatives. Nine SolarWinds solutions were named 2022 top-rated products by TrustRadius. TrustRadius is leveraged by many of our current and potential customers to help objectively pick solutions to support their needs. Our ninth annual IT Trends Report, based on extensive surveys and industry research, continues to reinforce our strategic direction. Productivity, reduction of tool sprawls and alert fatigue, resource and budget constraints, and complexity are all challenges that customers are looking to us to address. Last but not the least, we published the details of our next generation build system for the benefit of the broader industry. It is my hope that through the adoption of our Secure by Design framework, including the bill systems, we and others will make our customer environments safer and more secure. I'm proud of the progress of our teams and the efforts that they display every day. Transformations are never easy, and the increasing macroeconomic volatility and uncertainty are adding to the challenge. Having been part of many transformations, I'm confident that the changes we are driving through the business are the right ones for our customers and for our company. We are clearly seeing positive results from our deliberate actions, and I expect to continue to make progress in the second half of the year. With that, I will turn it over to Bart. to further expand on our financial performance and to provide a Q3 and updated full-year outlook. Buck?
spk07: Thanks, Sudhakar, and thanks again to everyone joining us on today's call. I'd like to start by reminding everyone of the strategic shifts we are making in our business. In 2021, we were focused on retaining our strong customer base. In 2022, we are turning our attention to re-accelerating growth with a subscription-first mentality. I think that it's important to emphasize that our subscription transition will be multifaceted. The first phase of the transition will entail selling on-premises subscriptions of both our existing products and our hybrid cloud observability product. The second phase of the transition as an evolution of the first phase will happen in 2023 as we launch the SAS version of our observability product. Our second quarter results are reflective of the initial progress with our transition and represent another quarter of execution on our strategy, despite increasing macroeconomic volatility and uncertainty. Turning to the numbers, we finished the second quarter with total revenue of $176 million, which is a slight decline compared to prior year and near the high end of the total revenue outlook we provided of $174 to $177 million. Like other companies with foreign currency exposure, we felt the impact of the decrease in the value of the Euro compared to the U.S. dollar. On a constant currency basis, our total revenue would have been approximately $180 million, which is a 2% increase over the prior year. As a reminder, we no longer adjust our revenue for the impact of purchase accounting, so our GAAP total revenue is equivalent to the total non-GAAP revenue measure we have historically reported. Digging into the revenue details, I will start with subscription revenue to go along with our subscription-first mentality. Second quarter subscription revenue was $37 million, up 25% year-over-year. Our subscription revenue growth reflects the initial success of our subscription-first efforts. As a reminder, and similar to our license and maintenance arrangements, as we convert maintenance customers to hybrid observability subscriptions, we recognize a majority of their revenue up front, typically more than 60%, and the rest ratably over the subscription period. Our subscription ARR as of June 30, 2022, was $148 million, which is an increase of 24% year over year. This growth is due to execution of our subscription first strategy, including the conversion of a portion of our maintenance base to the hybrid cloud observability platform. Maintenance revenue was $114 million in the second quarter, which is a decrease of 5% from the prior year. As we have discussed recently, our maintenance revenue has been impacted primarily by the conversion of a portion of our maintenance customers to subscriptions, as well as the lower Euro to US dollar conversion rate in 2022 compared to the prior year. Our maintenance renewal rate is turning back to historical norms. We are now at 91% on a trailing 12 month basis and our end quarter renewal rate for the second quarter is at 93%, which is consistent with our historical performance. We believe this is a testament to the loyalty of our customer base and our focused retention and expansion efforts over the past 12 months. Note that as we convert maintenance customers to subscription arrangements, we will exclude those customers from the renewal rate calculation. For the second quarter, license revenue is $25.1 million, which represents a decline of approximately 6% as compared to the second quarter of 2021. Keep in mind that our new perpetual license sales performance will continue to be impacted by our subscription first focus. As noted previously, our increased sales of subscriptions offset the decline in license revenue. We ended the second quarter with total ARR of $625 million, a slight increase over the prior year. We finished the second quarter of 2022 with 879 customers who have spent more than $100,000 with us in the last 12 months. which is a 13% improvement over the previous year. This marks the second consecutive quarter with double-digit growth in this metric. We continue to supplement our traditional high-velocity, low-touch sales approach with targeted efforts to build more strategic relationships with our enterprise customers, which we detailed at our analyst day in November. I'm also pleased to report that we delivered another quarter of strong non-GAAP profitability Second quarter adjusted EBITDA was $67 million, representing an adjusted EBITDA margin of 38%, which is in line with our outlook for the quarter, even as we continue to invest in our business. Excluded from adjusted EBITDA in the second quarter are one-time costs of approximately $3.7 million of professional fees related to the Sunburst cyber incident. We expect one-time cyber incident-related costs to fluctuate in future quarters, but to continue to trend lower over time. These one-time cyber costs are, however, difficult to predict. Turning to our balance sheet, net leverage at June 30th was approximately 3.9 times our trailing 12-month adjusted EBITDA. Our cash, cash equivalents, and short-term investment balance was $778 million at the end of the second quarter, bringing our net debt to approximately $1.1 billion. Our debt matures in February of 2024, and we expect to reduce our level of gross debt as we get closer to that date, and look to a potential refinancing. I will now walk you through our outlook before turning it back over to Sudhakar for some final thoughts. I will start with our third quarter guidance and then discuss the changes that we are making for the full year. For the third quarter, we expect total revenue to be in the range of $180 to $185 million, representing a slight decrease to 2% growth over prior year. On a constant currency basis, revenue at the low and high end of the range would be approximately $5 million higher, and it would represent growth of 2 to 5 percent. One of the primary drivers of revenue performance in the third quarter is expected to be an increase in sales to our federal customers. We are encouraged by our efforts in working closely with our federal customers as we are seeing an improvement in both new sales and renewals from our existing federal customers who have been slow to reach spending decisions earlier in the year. Adjusted EBITDA margin for the third quarter is expected to be approximately 39 to 40 percent. Non-GAAP fully diluted earnings per share is projected to be 19 to 21 cents per share, assuming an estimated 161.8 million fully diluted shares outstanding. Finally, our outlook for the third quarter assumes a non-GAAP tax rate of 25%, and we expect to pay approximately $7 million in cash taxes during the third quarter. While our business model has proven to be resilient during challenging economic conditions, and we remain confident in our business transition, we are lowering our full-year guidance. This is due to a combination of factors, primarily a weakening of the Euro, as well as lower expectations in new sales of our products. Our revised new sales expectations are due to some modest incremental softness in our end markets, as well as prudently accounting for the broader macro uncertainty created by worldwide concerns over inflation, supply chain disruption issues, and challenges in Europe due to the Russia-Ukraine conflict. Lastly, we're appropriately accounting for the fact that we remain early in our subscription transition. For the full year, we now expect total revenue to be in the range of $715 to $725 million, which is a slight decrease to a 1% increase year over year, compared to prior guidance of $730 to $750 million. On a constant currency basis, our total revenue guidance would be $730 to $740 million, an increase of 2% to 3% year over year. Adjusted EBITDA margin for the year is expected to be approximately 39% to 40%. which is slightly lower than the 41% we set at the start of the year. While we are carefully scrutinizing our expenses, we remain focused on our product roadmap and delivering on our on-prem hybrid cloud observability products in 2022, as well as the full SAS version in early 2023. Non-GAAP fully diluted earnings per share is projected to be 81 to 86 cents per share, assuming an estimated 162.6 million fully diluted shares outstanding. Our full year and third quarter guidance assumes a euro to dollar exchange rate of 1.02. We still expect an acceleration of our total revenue in the second half of the year. As discussed earlier, our federal business has seen positive signs from a demand generation perspective, and the fourth quarter is typically our best quarter of the year with our commercial customers. We will continue to lead with a subscription-first focus as it relates to new sales, and we'll also focus on migrating our maintenance customers to our hybrid observability products. Finally, when you review our GAAP earnings, you will notice an impairment of our goodwill. Our goodwill balance is primarily the result of the take private transaction that occurred in 2016, as well as subsequent acquisitions that added to the amount of goodwill. A non-rattable portion of goodwill was transferred to Enable as a result of the spin that occurred a year ago. However, the significant majority of the goodwill remained on our financial statements. As of June 30, 2022, in light of the current macro environment and the continued decline in our market capitalization, along with the lowering of our financial forecast for 2022, we determined it appropriate to perform an interim analysis of our reporting unit. The macro economic conditions considered include deterioration in the equity markets evidenced by a sustained decline in our stock price and market capitalization, as well as those of our peers and major market indices. the impact of foreign currency fluctuations between the Euro and U.S. dollar on our business, and an increase of the weighted average cost of capital, primarily driven by an increase in interest rates. We utilized a combination of both an income and market approach in our assessment, and as a result of the interim impairment analysis as of June 30th, we determined the carrying value of our reporting unit exceeded its fair value, and therefore, a $612 million non-cash goodwill impairment charge was recognized for the quarter. With that, I will turn the call back over to Sudhakar for his closing remarks.
spk00: Thank you, Bart. Despite the tough macroeconomic environment, we continue to make solid progress towards the goals we outlined during our analyst day in November. I remain very optimistic that our solutions will address the needs of our customers in any environment, and especially in environments such as the one we are in. We believe that in this climate, simplicity, digital transformations, efficiencies, and productivity gains are all even more relevant, and we are ideally suited to support our customers' needs. Equally, our disciplined and highly leveraged operating models enable us to continue to focus on business growth while delivering significant EBITDA margins. Delivering organic ARR growth, expanding EBITDA margins via operating leverage, and optimizing our capital structure remain key priorities. I'm proud of our team for our solid Q2 performance. The midpoint of the outlook that Bart provided still represents year-over-year growth in a tough macro and foreign exchange environment. And that's a testament to the relevance of our solutions, the execution abilities of our teams, and most critically, the trust that our customers and partners place in us. We remain steadfast in executing our mission to help customers accelerate their business transformations via simple, powerful, and secure solutions for multi-cloud environments. And we have an experienced management team who has led companies through many economic cycles. I'll conclude by again thanking our employees, partners, customers, and shareholders for their commitment to SolarWinds. Bart and I will now be happy to address your questions.
spk08: As a reminder, if you would like to ask a question, please press star then 1 on your telephone keypad. Our first question is from Kirk Matern with Evercore ISI. Your line is open.
spk06: Yeah, thanks very much. I guess just to start, Sudhakar, can you just give us a little bit more color on the macro backdrop and maybe as you're making these changes to new sales assumptions, are there certain products that are holding up better than others? Obviously, Europe, I imagine, is sort of a point of weakness for you all, but can you just give us some more color in terms of what exactly you're expecting in the back half of the year, a little bit more on a product basis, just so we can understand what's getting hit more than maybe some other things that are holding up better. Thanks.
spk00: Definitely, Kirk. First of all, I hope you're doing great. When we speak about macro, let me segment it in this way, Kirk. The bigger headwind that we have experienced so far that we continue to anticipate in the second half of the The year is more the foreign exchange headwind, as Bart outlined, and helped normalize. So that is still my bigger concern. In terms of specific geographies, you already mentioned Central Europe as being a soft spot. And again, due to the war there and other factors that are impacting the Eurozone, we are seeing some softness in Central Europe. But from a product perspective, there is not a particular product that's experiencing any kind of softness. If anything, the reception of the hybrid cloud observability solutions, the service management solutions which are accelerating, as well as our database monitoring solutions, has been quite robust. and well diversified, I would say. When I say well diversified, both geographically as well as segment-wise, meaning large enterprise customers, medium enterprise, and so on. So that is not my primary concern at this point. My primary concern from a macro standpoint is still the FX environment as a result of the events in Europe.
spk06: Great. And maybe just one thought from Bart. Bart, just on the renewal rate side, obviously really nice progress on that. Do you think – what should we be sort of assuming on that front is sort of this new low 90s range, sustainable? You know, how are you all thinking about it maybe into the back half of the year? Thanks.
spk07: Yeah. Yeah, as we model it out, Kirk, I mean, we still think in the 90 to 91 percent range is what we use whenever we're modeling. And, you know, and then anything that we can – anything we do to beat that just gives us a little upside. But, yeah, we're using 90 to 91.
spk09: Super. Thank you all.
spk07: Thanks, Kirk. Thanks, Kirk.
spk08: Our next question is from Matt Hedberg with RBC Capital Markets. Your line is open.
spk05: Hey, great. Thanks for taking my questions, guys. So, Doctor, maybe just as a follow-up to Kirk's question, can you give us a little – and I think we all appreciate the FX impact is significant. I guess on the macro side, you guys have such broad exposure globally to SME spending, and you mentioned Europe. I'm just wondering, though, Can you help us think through how maybe the quarter progressed? I mean, did you start to see maybe some softening demand as the quarter ended and maybe, you know, how July is trending this far? Just trying to get a little bit better sense of kind of the health of the end markets exclusive of FX impacts.
spk00: Yeah. Matt, let me attempt to address it and feel free to ask me a follow-up here. Oftentimes, I think that SMB segment is clubbed as one. Most of the SME and SMB segment that we support are still very professional organizations that are going through their own digital transformations, and for them, productivity, cost reduction, elimination of tool sprawl, they all continue to be very important initiatives, even in this environment. What we've been able to do for them is give them more buying flexibility through our hybrid cloud observability solutions and subscription models. So as we went through the quarter, if I call it normalized for linearity in every quarter, I would say demand as we ended Q2 remained robust relative to historical levels, so there was no deceleration. And there's always week-by-week variations, but there was no significant deceleration relative to previous quarters or previous years for that matter. And that trend has continued in July, I would say.
spk05: Great. No, that's helpful. And obviously, SolarWinds has been around for a long time and been through many economic cycles. Can you help us think about the value of your solutions to your end customers that may see tightening IT budgets? Maybe just talk about quick sales cycles, quick implementation times, quick ROI. Just sort of curious from a historical perspective how these end markets held up in more challenging economic times.
spk00: Absolutely, Matt. And I touched on it in my prepared remarks. One of the key driving forces behind our solutions is delivering best-in-class time to value. I'm a big believer in it. Historically, we have built incredibly simple and incredibly powerful solutions. And while they were targeted, let's call it, to on-premises type environments, the same fundamental philosophies of simplicity and driving superior time to value have now migrated and translated to, let's say, our multi-cloud solutions and our hybrid cloud solutions. So as we educate our sellers and our partners, our fundamental focus is how do we deliver the best and the most cost-effective value to our customers, And in especially CapEx-constrained environments or in cycles where you're scrutinizing every investment, time to value becomes super paramount. And that's where I believe we shine. Added to that now is how we are uniquely integrating some of our assets to not only identify issues in your environments, but also actually help you remediate them. So to the degree that we continue to do that successfully, we also are able to help significantly improve the productivity of our customers. So in many ways, the articulation of our value proposition is the same as it used to be, except in broader, more complex environments and in multi-vendor environments, which again talks to why I believe the deal sizes are growing in some cases, and as we noted, the number of customers spending more than $100,000 with us has grown 13% year over year.
spk09: Thank you.
spk08: The next question is from Sanjit Singh with Morgan Stanley. Your line is open.
spk04: Thank you for taking the question. Bart, I wanted just to just double-checked on the assumptions on the guide. It sounds like in the quarter you saw a little bit of softness in Europe. So, Docker certainly called out that ethics is a bigger factor here. But in terms of the guidance that's assumed in the back half, do you assume that the softness that you're seeing remains sort of relegated to Central Europe, or you're sort of baking in some potential new business softness in other regions as well? Just wanted to understand what you saw versus what you're assuming for the second half.
spk07: Yeah, I mean, part of the reason why we brought down the second half, Sanjay, is just due to some of the, you know, just to be prudent about what we think can happen in the second half and just when we're running the scenarios of what the possibilities are. So most of it is from FX, but we are assuming a little bit of softness, not just in Central Europe, but a little bit in all regions, to be honest with you.
spk04: Understood. Very clear. Thank you, Bart. And then, Sudhakar, on the product roadmap, this year in terms of like the hybrid observability solution, integrating that with service management, it's definitely going to be more of an on-premise hybrid solution in 2022. Can you walk me through the eyes of the customer when you release the SaaS version in 2023? Is that something you're expecting them to adopt in 2023? Or what's going to be sort of the upgrade or migration triggers to move from this hybrid to ultimately to the SaaS solution? What are sort of the adoption triggers, if you will?
spk00: Definitely. Sanjay, think of this as the following. While we refer to hybrid and the SaaS versions, Think of that as a continuum. So in essence, we land at many customers, given that they are previously premises-based customers with a hybrid solution, and we are able to evolve them into the SAS version or a mix of it, depending on their deployment needs. So that's, I would say, the uniqueness of our solution from a deployment standpoint. So where we stand today is that the hybrid cloud observability solutions are generally available, meaning that any customer, new or existing, can adopt and implement those solutions. The SaaS observability solutions We started releasing early versions of those in April of this year, and there's a subsequent version that we will be giving customers this month, and then that train continues. So we're already getting significant and meaningful feedback from customers on the SaaS version already in 2022, which motion will only accelerate into 2023. So we may... segmented as some of the new customers that are adopting, let's say, net new SolarWinds, might initially decide to go straight into the SaaS version in 23. But for the existing customers, it'll be a multi-year, call it, migration slash transition. But the comfort we give them is that they can adopt some or all of SaaS at the pace at which their business needs. So it's not a forced transition to them. And from a technology standpoint, it's a continuum.
spk04: Makes complete sense. Looking forward to it in 2023. Take care.
spk08: The next question is from Rob Oliver with Baird. Your line is open.
spk02: Great. Thanks, guys. Good morning. Appreciate you taking my question. Sudhakar, you called out the impact of partners and the partner ecosystem, I think, a part of your strategy, which appears to be evolving nicely. So I was wondering if you could talk a little bit about that evolution of you guys from a largely direct business to a partner-driven business, how that's playing out today, and then also what role the partners will play in this all-important move towards hybrid cloud and the release of cloud, HyperCloud GA in 23. Thanks. Absolutely. Rob, thanks.
spk00: Thanks for the question and the response is somewhat multi-pronged so I'll try to simplify it as much as I can. At the outset I'll say that SolarWinds always had partners as part of its ecosystem. What we are doing now is in many ways expanding and clarifying the partner motion. So I'll touch on first the global system integrators. We are expanding both our strategic relationships as well as our go-to-market relationships with our GSI partners. This is going to be focused largely on the larger enterprises but also on SMEs in the context of some of our GSIs being MSP partners. So there is a technology integration aspect to it, as well as a co-sell and a resell aspect to it. So we have a dedicated team working with GSIs, and we are gaining some really good traction through that team. Second is the traditional partners. In the traditional partner context, While largely driven in EMEA and APJ, given the partner-driven aspect there, we're also expanding the same principles into the Americas. And here what I would say is clarification and amplification of our partner programs. I look at our partners as an extension of our sales teams, and so we are driving areas such as enablement, incentives, tiering across those partners, across all of these geographies. And they obviously get added incentives for not only gaining expertise in our solutions, but also creating demand for our solutions. And then last but not least is the hyperscalers themselves. I would say we have co-sell motions with them, and as some of our SaaS solutions come more online and become generally available, we will have marketplace relationships with them as well.
spk02: Great. That's a lot of great color. I appreciate it, Thakur. And then one more, just you guys expressed I think a fairly confident tone relative to the all-important Q3 here with it being federal fiscal year-end. obviously extremely important customer for you guys, and we're now a few years past the hack and stuff. So if you could just provide a little bit more color on what gives you that confidence around both federal sales and federal renewals, and if maybe you're seeing early indications already ahead of fiscal year end, any color there would be really helpful. Appreciate it.
spk00: Absolutely, Rob. As you know, it's about a year and a half since the Sunburst incident, But even from the time that the incident happened, we have been incredibly committed to our federal customers, both in terms of how we provided support, how we helped them analyze any possible impact to their environment, and obviously giving them confidence. Throughout this, they also have appreciated not only the engagement of our teams, but also the capabilities that we provide to them in terms of products. So our first focus really in I would say in 2021 was ensuring the safety and security of their environment. So it was less about demand gen and selling activities as much as customer success activities, which then, as the year progressed, we evolved as we gained more of their confidence into being able to propose more of our solutions as well, including our database monitoring solutions. So that has consistently and incrementally yielded fruit, I would say, first through increase and improvement in our renewal rates, and more recently in terms of our new business as well. And so throughout this year, we have demonstrated progress, and obviously Q3, as you said, is, as many call them, the Super Bowl quarter of the federal segment. And our teams have done an incredible job of customer outreach, pipeline building, and now focused on conversion in Q3. Those are the reasons why I believe not only is the success possible in Q3, but I also believe it's sustainable because many customers who were, let's call it, on the edge or on the ledge have redoubled and recommitted themselves to SolarWinds solutions.
spk02: Very helpful. Thanks again, guys. Have a great day.
spk08: The next question is from Eric Superger with J&P Securities. Your line is open.
spk01: Yeah, thanks for taking the question. First off, how should we think of the contribution from federal? I think it might have been in the 5% to 10% of revenue range historically. Is it still in that range or has it come down? And then can you comment how you segment your exposure to customers? How much do you think is SMB or how... How should we think of your exposure to the S&D market? Is it pretty much completely S&D or how do you segment that?
spk07: Thanks, Eric. I'll answer the first part of the question on the federal side. You know, you're right as far as the 5 to 10% range. Total business with the federal government is probably closer to that 10% number, but not over that number. We don't historically break out and disclose that separately because it has never exceeded that 10% threshold, but it is definitely closer to the 10 than the 5. And I think, Sudhakar, take the SMB side.
spk00: In terms of the SMB, or I like to call it SME, but broadly speaking, that remains our foundation and that will remain the foundation of our velocity motion. But the way I would describe our mix is that our mix is growing much more significantly to the mid-market and the enterprise customers for a variety of reasons. One is the breadth and capability of our solutions. Two is the selling motions that we have expanded to. And three is the partners that I mentioned to an earlier question by Rob.
spk07: And, you know, Eric, honestly, we've talked about this in the past. You know, we don't do a lot of distinguishing of our customer base, you know, you know, SMB or even Fortune 500, we sell to everybody, all IT users. And so, you know, our average sales price is still less than $10,000 per transaction. So it's not like we're, you know, we're making dramatic shifts. We are trying to target bigger customers with part of our sales motion. But still, the core of our business is still, you know, selling to the IT user and trying to solve his problem.
spk09: Very good. Thank you.
spk08: Again, that's star one to ask a question. The next question is from Terry Tillman with Truist Securities. Your line is open.
spk03: Oh, great. Hey, good morning, guys. This is Connor Passarella on for Terry. Thanks for taking my question. I just wanted to ask one around the next-gen build system. Is there a meaningful change in how products are positioned with this new format? And are there any financial benefits related to this in the form of R&D efficiency? And then maybe if you could just share the timing of this effort and how long that'll take. Thank you.
spk00: The next-gen bill system is already being implemented internally and now we are in the mode of what I would consider continuous progress, continuous improvement. As I mentioned in my prepared remarks, we've also published what we did externally. I would say for the broader benefit of other software vendors and many of our customers who are also creators of software. In terms of financial or I should say financial impact. We did this largely to improve our supply chain security efforts, and we are increasingly being recognized as a leader in improving software security and software security build processes. So I would say any financial impact that I'm thinking of will be an indirect effort I should say, of that rather than a direct effort.
spk09: Okay, great. Thank you. Makes sense. Thanks, Connor.
spk08: We have no further questions at this time, and this will conclude today's conference call and webcast. Thank you, everyone, for participating. You may now disconnect.
spk09: Thank you all.
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