SolarWinds Corporation

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the SolarWinds Q3 2022 earnings call. Today's conference is being recorded. 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 the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. I would like to turn the conference over to Tim Karraja. Please go ahead.

Tim Karraja Thank you. Good morning, everyone, and welcome to the SolarWinds Third Quarter 2022 Earnings Call. With me today is Sudhakar Ramakrishna, our President and CEO, and Bart Kallsu, our CFO. Following prepared remarks, we'll have a question and answer session. This call is being simultaneously webcast on our investor relations website at investors.solarwings.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 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 our filings with the SEC. Copies are available from the SEC on our investor relations website. We completed the subpoena 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. Almost 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 calls 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 third 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 we will not be final until we file the quarterly report on phone. Thank you. With that, I'll now turn the call over to Sudhakar.

Thank you, Tim. Good morning, everyone, and thank you for joining us today. As always, I'd like to start by thanking our employees, customers, partners, and shareholders for their ongoing commitment to SolarWinds. I'm extremely proud of all our team accomplished during the quarter, considering a challenging macro environment. Let me start with a few comments on our third quarter 2022 results. We had several highlights, including continued subscription revenue growth in line with our subscription first strategy, continued execution on customer retention, healthy EBITDA margins reflecting our commitment to expense and operating discipline, expansion of our routes to market with our announcement of our Transformer Partner Program, strong adoption of hybrid cloud observability representing the superior value that we believe we deliver to customers, continued federal business execution demonstrating our strength in and commitment to the public sector, and major product announcements including key milestones in our observability evolution. I'll touch on some of these before turning it over to Bart. for more color on the quarter, as well as our financial outlook for the balance of the year. In Q3 2022, we delivered revenues of $179 million, down 1% year over year. Excluding an approximately $1 million currency headwind since we provided guidance, revenue, assuming foreign currency exchange rates used in our previously issued outlook, would have been within our guidance range, and on a constant currency basis, we delivered a 1% year-over-year growth. I'm excited to report that in Q3, our in-quarter maintenance renewal rate was 91%, and our trailing 12-month renewal rates are now at 91%. Both these metrics were impacted negatively by currency headwinds, but even with that, I'm happy to report the strong execution. I attribute these results to the commitment of our team, the relevancy of our solution, the resiliency of our business model, and the trust our customers place in us. We continue to make demonstrable progress with our subscription first strategy and deliver third quarter subscription revenue growth of 31% year over year. While shifting to a subscription-first strategy has resulted in some total revenue headwinds, we continue to believe it is the right strategy for our business as we focus on growing annual recurring revenues to over a billion dollars in the coming years. The improving bookings mix and conversions from maintenance to subscriptions lay the foundation for even more predictable revenue and the opportunity to expand our lifetime value with customers. We ended the third quarter of 2022 with 882 customers who have spent more than $100,000 with us in the last 12 months, an increase of 12% over the comparable period in the previous year. More and more, we are helping customers reduce tool sprawl achieve comprehensive visibility across multi-cloud environments, eliminate alert fatigue, and accelerate their digital transformation, leading to larger deal sizes. Adjusted EBITDA was $70.3 million, representing an adjusted EBITDA margin of 39% in line with the outlook we provided. Now, I'd like to take a step back and reflect on the strategy we laid out at our Analyst and Investors Day one year ago and what we have accomplished since then. Last year, we talked about our retain, evolve, and grow strategy. We committed to our customers and to the industry that we will retain the best of what made SolarWinds what it is today, evolve with our customers' needs, and grow together in our mission to help customers accelerate their business transformation through simple, powerful, and secure solutions designed for hybrid and multi-cloud environments. I believe our portfolio and execution enable us to deliver the best time to value, best time to detect issues, and the best time to remediate issues in our customers' multi-cloud environments. We aim to be the best at improving our customers' security, productivity, and total cost. Our portfolio is broad, and we believe our addressable market is large. We're making strong progress in our database performance monitoring and service management parts of the business. But today, I'll focus on our evolution to observability and its significance to our future growth. A key element of our strategy is transitioning from monitoring to observability solutions to address the productivity, cost, and complexity challenges our customers increasingly face. We made tremendous progress during Q3, and many of you joined us for our first-ever SolarWinds Day event two weeks ago, where we made exciting announcements. First, we unveiled SolarWinds Observability based on our SolarWinds platform which will be the basis for all future solutions. This full-stack software-as-a-service solution is built to unlock the productivity of DevOps, DevOps, CloudOps, and ITOps professions. We also announced an updated version of our SolarWinds hybrid cloud observability solution less than six months after its initial introduction. Hybrid cloud observability now features enhanced anomaly detection capabilities powered by artificial intelligence and machine learning while continuing to enable SolarWinds customers to migrate from on-premises to SaaS at their own pace and while making the most of their IT investments. Traditionally, our business focused on tools which monitored network system applications and databases. However, hybrid and multi-cloud IT environments are becoming increasingly complex and more challenging for customers to manage. Our observability solutions are designed to solve this problem by providing comprehensive visibility into the complete environment in both public and private clouds to expedite anomaly detection and resolution. SolarWinds was built on a foundation and commitment to providing customers with simple, secure, and value-based solutions to help them digitally transform their companies. These latest announcements reinforce our foundational principles. Another element of our retain, evolve, and grow strategy we talked about at last year's Analyst and Investors Day was expanding our customer reach and, importantly, growing our partner ecosystem. To that end, we announced the launch of our SolarWinds Transform partner program last month. Transform represents our enhanced focus on channel growth and development, and we believe it will improve the way we partner with technology distributors, value-added resellers, global system integrators, managed service providers, and cloud partners across the globe. We are excited to strengthen our relationship with our partners in our shared vision to help customers accelerate their business transformation. We also make key leadership hires to support our channel growth, including Chad Reeves, who joined SolarWinds during the quarter as our President of America's Sales and Global Challenge. Chad brings 25 years of technology industry experience serving in leadership positions at IBM and most recently at VMware. Now I want to take a moment to address the macro environment. Amongst others, one thing that has stood out to me during my tenure at SolarWinds is the resiliency of our business model and the stickiness of our solutions, particularly during challenging periods. We believe our highly cost-effective solutions Diversified customer base, compelling value proposition, and high-velocity transaction models enable us to operate successfully through challenging macro environments. This is reflected in our consistently strong customer retention as reflected by our strong renewal rates. In addition, although we continue to see healthy demand and commitment from our customers, like many of our software peers, we did experience some delays in deal closures during the quarter, particularly in Europe. We'll continue to monitor the environment closely, but we remain confident in our long-term opportunity and are sharply focused on executing on our strategic priorities. We are and always have been focused on our capital allocation and expense management. We continue to seek to balance growth and margin expansion. Our management team has led companies through previous downturns, and we intend to diligently manage costs across our businesses. These attributes remain a foundation of who we are, and over the years, we have worked hard to build an even sturdier business model on this foundation. With that, I will turn it over to Bart to expand on our financial performance and to provide an updated, fuller outlook. Bart?