SolarWinds Corporation

Good morning and welcome to the SolarWinds fourth quarter 2022 earnings call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you'll need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Tim Karaja, Group Vice President of Finance. Thank you. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to the SolarWinds fourth quarter 2022 earnings call. With me today is Sudhakar Ramakrishna, our president and CEO, and Bart Kalsu, our CFO. Following the prepared remarks, we will 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 the summary slide deck, which is intended to supplement our prepared remarks during today's call. Please remember that certain statements made during this call are forward-looking statements, including those concerning our financial outlook, our market opportunities, our expectations regarding customer retention, our evolution to a subscription-first mentality, and the timing of the phases of such evolution, the impact of the global economic and geopolitical environment on our business, and our gross level of debt. These statements are based on currently available information and assumptions, and we undertake no duty to update this information except as required by law. These statements are subject to a number of risks and uncertainties, including the numerous risks and uncertainties highlighted in today's earnings release and our filings with the SEC. Copies are available from the SEC on our investor relations website. As a reminder, the financial results presented on this call reflect SolarWinds as a standalone business. and do not include any contribution from the enabled business we spun off in July 2021. 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 non-GAAP financial measures. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call is available in our EarnExpress 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 fourth quarter of 2022, non-GAAP total revenue is equivalent to our GAAP total revenue. Finally, we note that financial results discussed on today's call and in our earnings release are preliminary and pending final review by our external auditors and us, and will only be final once we file our annual report on Form 10-K. With that, I will now turn the call over to Sudhakar.

Sudhakar Ramamurthy Thank you, Tim. Good morning, everyone, and thank you for joining us today. As always, I'd like to thank our employees, customers, partners, and shareholders for their ongoing commitment to SolarWinds. Looking back at 2022, I'm incredibly proud that our team delivered top-line growth in a challenging macro environment. We believe these results are a testament to our business model's resiliency, the value we provide to our customers, and the entire SolarWinds team's competence, commitment, and attitude. We had several highlights in the fourth quarter, including strong subscription revenue growth in line with our subscription first strategy, continued execution on customer retention, demonstrating the value proposition of our solutions, growing traction with our observability solutions, representing the superior value that we believe we deliver to customers, continued innovation in our service management, ITSM, and database product lines, representing an increasingly diverse portfolio participating in growing markets, healthy cash flow generation and adjusted margin, reflecting our commitment to our expense and operating discipline, de-levering our balance sheet, which Bart will discuss further, and continued progress with our partners and global system integrators as we extend our reach to customers through our partners in a scalable and cost-effective manner. I will now touch on some of these before turning it over to Bart for more color on the quarter and our financial outlook for Q1 2023 and the full year 2023. In Q4 2022, we delivered total revenues of $187 million, above the high end of the range we provided, and a slight increase year over year. On a constant currency basis, we delivered 2% year-over-year growth. I'm excited to report that in Q4, our in-quarter maintenance renewal rate was 92%, and our trailing 12-month renewal rates are now at 93%. Both of these metrics were negatively impacted by currency headwinds. But even with that, I'm happy to report our strong executions. I attribute these results to the commitment of our team, the relevancy of our solutions, the resiliency of our business model, and the trust that our customers place in us. We continue to make significant progress with our subscription-first strategy and delivered fourth-quarter subscription revenue growth of 45% year-over-year. As I've said before, I consider our evolution to subscription not just as a business model change, but as a way of delivering greater value to customers. While shifting to this strategy has resulted in some total revenue headwinds, we continue to believe it is the right way to deliver customer value and focus on growing annual recurring revenues to over a billion dollars in the coming years. We believe the conversion from maintenance to subscription lay the foundation for even more predictable revenue and the opportunity to expand our lifetime value with customers. We ended the fourth quarter of 2022 with 889 customers who have spent more than $100,000 with us in the last 12 months, an increase of 7% over the comparable period in the previous years. We are increasingly helping our customers reduce tool sprawl, achieve comprehensive visibility across multi-cloud environments, eliminate alert fatigue, and accelerate their digital transformation, all while improving their productivity. Doing so has enabled us to win larger deals. Adjusted EBITDA was $74.5 million, representing an adjusted EBITDA margin of 40%, which is about a 38% to 39% outlook we gave for the quarter. Now I'd like to take a step back and reflect on what we accomplished in 2022 and how this sets us up for 2023. 2022 was a transformational year for SolarWinds. as we accelerated our progress on the SolarWinds platform and reached significant milestones in observability, service management, and database monitoring. Simultaneously, we expanded our customer reach via our Transform partner program, critical GSI relationships, and the ongoing evolution of our internal teams. I believe these vital foundations help us to be the vendor of choice to help customers accelerate their digital transformations in an increasingly multi-cloud world and to deliver the best time to value, time to detect issues, and time to remediate them with simple AI-powered solutions. We are increasingly helping customers eliminate tool sprawl, significantly reduce alert fatigue, improve productivity, and reduce costs. In 2022, we evolved from a monitoring vendor to an observability solutions provider. We launched key new solutions last year, our hybrid cloud observability and cloud native SolarWinds observability solutions. We introduced our hybrid cloud observability solution in April and have since launched enhanced detection capabilities powered by artificial intelligence and machine learning. We believe our hybrid cloud observability solution is the only true hybrid solution that allows customers to migrate from on-premises to SaaS at their own pace. We are seeing a healthy traction with hybrid cloud observability and a long runway for growth. We believe that customers appreciate the simplicity of packaging and pricing, along with the feature richness of hybrid cloud observability. We followed our hybrid cloud observability launch with our cloud-native SolarWinds observability solutions in October, available on Azure and AWS clouds. As we evolve the SolarWinds platform, we aim to deliver observability solutions across network, infrastructure, systems, applications, databases, digital experiences, and log monitoring in one platform across private and public clouds with single pane of glass visibility. While it is early days, we are excited about SolarWinds observability's ability to support every customer regardless of where they are in their cloud journey, with the flexibility to deploy on a private cloud, public cloud, or as a service. Our observability solutions have already earned multiple industry awards and recognitions in recent months. As we look to 2023, we believe IT environments will continue to grow in complexity and budgets will remain constrained. Customers will value solutions that improve their productivity and lower their costs. I believe our products and services offerings are ideally suited to address these challenges with our compelling observability, service management, and database solutions. It's also my belief by establishing all our ongoing innovations on the SolarWinds platform, we can deliver even greater simplicity to our customers while creating the ability to expand the lifetime value of our customer relationships. With that, we invite you to hear more about our solutions at our upcoming virtual SolarWinds Day on Veterans Day, February 15th. During the event, industry experts and customers will share practical advice on solving today's IT problems. We are also showcasing new AI-powered observability capabilities using real-world customer use cases. Lastly, our channel partners are vital in helping customers accelerate their digital transformation with our solutions. Recall that in October, we announced the launch of our SolarWinds Transform program, representing our enhanced focus on channel growth and development across distribution, global system integrators, managed service providers, and cloud partners. As an example of our progress, during the quarter, we announced an expanded partnership with Dry Ice, a division of HCL Software. HCL software powers millions of apps at over 20,000 organizations, including over half of the Fortune 1000 and Global 2000 companies. We believe the expanded partnership will focus on bringing together the best-in-class advanced AI ops, end-to-end observability, and service management platforms from both companies. Now, I want to take a moment to address the macro environment. As we all know, 2022 was a challenging year for the technology industry and the broader community. Although we generally continue to see healthy demand and commitment from our customers, we are cognizant of the headwinds being experienced across the IT spending industry while focusing on our strategy and what we can control. And while we are not immune, we believe our highly cost-effective solution, compelling time to value proposition, diversified customer base across sizes and industries, and high-velocity transaction models enable us to operate successfully through challenging macro environments. This is reflected in our Q4 results. including our consistently strong customer retention as demonstrated by our strong renewal rates and our ability to deliver year-over-year revenue growth in 2022. As I've said many times, our ability to deliver revenue growth and generate healthy cash flow while remaining focused on profitability is a solid testament to the resiliency of our business model and stickiness of our solutions particularly during challenging periods. We are and always have been focused on capital allocation, disciplined expense management, and driving operational efficiencies across all aspects of our business while focusing on growth and our broader subscription transition. Given the uncertain macro outlook for 2023, we made further optimizations to our expense structure last month as part of our ongoing focus on improving operating margins. Looking ahead, we will continue to monitor the environment closely, and we plan to hire selectively while seeking to improve profitability in 2023. We've worked hard to build a sturdy business model and are unwavering in our belief in our strategy, market, and ability to execute. With that, I will turn it over to Bart to expand on our financial performance and provide a Q1 and full year outlook.

Bart? Thanks, Siddharth, and thanks again for joining us today. I want to remind everyone of our 2022 strategic focus on growing with a subscription-first mentality. With this, it is essential to emphasize that our subscription transition will be multifaceted. The first phase of the evolution entails selling subscriptions for our existing on-premises products and our hybrid cloud observability product. The second phase of the transition began with the recent launch of SolarWinds Observability, our SaaS solution. We believe that these two models of subscription growth will persist in our business, and our overall focus is to grow subscription ARR. while exercising operating discipline. These efforts, when combined with our other subscription products, have resulted in a subscription business with close to $175 million of ARR, and our fourth quarter results reflect our ongoing progress with this transition and another quarter of solid execution. Turning to the numbers, we finished the fourth quarter with total revenue of $187 million, which is a slight increase compared to the prior year and above the total revenue range of outlook we provided of $178 to $183 million. On a full year basis for 2022, revenue finished at $719 million, which was slightly higher than the prior year and well above the total revenue range of the outlook we provided of $710 to $715 million in our Q3 earnings release. Like other companies with foreign currency exposure, we felt the impact of the decrease in the value of the Euro compared to the US dollar. On a constant currency basis, our fourth quarter total revenue would have been approximately $191 million, which is an increase of 2% year over year. On a full year basis for 2022, constant currency revenue would have been approximately $733 million, which is also a 2% growth compared to the prior year. We ended the fourth quarter with total ARR of $636 million, also up 2% year-over-year. And on a constant currency basis, our total ARR would have increased over 3% versus the prior year. Beginning in Q4, we revised the methodology used to calculate total ARR. We now exclude the impact of price increases enacted during the maintenance contract renewal and only recognize the price increase impact to ARR upon the renewal of the maintenance contract. While this change does not have a material impact to ARR given our high renewal rates, we felt this was a change that would bring our definition more in line with others in the industry. We recalculated prior year total ARR to conform to the revised methodology which is reflected in these year-over-year growth rates. Our subscription ARR, as of December 31, was $175 million, which is an increase of 30% year-over-year. This growth is mainly due to the execution of our subscription first strategy and the conversion of a portion of our maintenance space to the hybrid cloud observability solution. Digging into the revenue details, our fourth quarter subscription revenue was $50 million, up 45% year-over-year. with full year subscription revenue of $168 million, up 35% year over year. Our subscription revenue growth reflects the ongoing success of our subscription first efforts. The transition to a subscription first strategy creates headwinds in the current quarter's total revenue. However, we believe that an increasing percentage of new deals made on a subscription basis will result in higher recurring revenue in the future. Maintenance revenue was $115 million in the fourth quarter, which is a decrease of 3% from the prior year, and $459 million in 2022, which is a decrease of 4% from the prior year. As we have discussed recently, our maintenance revenue has been impacted by the conversion of a portion of our maintenance customers to subscriptions and the lower Euro to U.S. dollar conversion rate in 2022 compared to the prior year. Our maintenance renewal rate is 93% on a trailing 12-month basis and 92% in-quarter renewal rate for the fourth quarter. These rates are consistent with our historical performance and currency headwinds impact both. The return in 2022 to our historical renewal rates is a testament to the loyalty of our customer base and our focused customer retention and expansion efforts. Note that as we convert maintenance customers to subscription arrangements, we exclude those customers from the renewal rate calculation. For the fourth quarter, license revenue was $22 million, representing a decline of approximately 34% compared to the fourth quarter of 2021, and $93 million in 2022, which is a decrease of 19% from the prior year. Remember that our new perpetual license sales performance will continue to be impacted by our subscription-first focus. As noted previously, our increased subscription sales offset the decline in license revenue in the quarter. We finished the fourth quarter of 2022 with 889 customers who have spent more than $100,000 with us in the last 12 months, which is another quarter of improvement over the previous year. I'm pleased to report that we delivered another quarter of strong non-GAAP profitability. Fourth quarter adjusted EBITDA was $74.5 million, representing an adjusted EBITDA margin of 40%. which is above the 38% to 39% outlook we gave for the quarter. On a full year basis, adjusted EBITDA was $280 million, representing an adjusted EBITDA margin of 39%, which is in line with the outlook we gave for the year. Excluded from adjusted EBITDA in the fourth quarter are one-time costs of approximately $5.9 million of litigation and governmental investigation costs and other professional fees related to the Sunburst cyber incident. We expect one-time cyber incident-related costs to fluctuate in future quarters, and these one-time cyber costs are difficult to predict. Turning to our balance sheet, net leverage at December 31 was approximately 3.9 times our trailing 12 months adjusted EBITDA. Our cash equivalents and short-term investment balance was $149 million at the end of the fourth quarter, bringing our net debt to approximately $1.1 billion. In November, we refinanced our debt and extended the maturity date from February of 2024 to February 2027. In connection with the refinancing, we made a voluntary prepayment of approximately $350 million, which was in addition to the voluntary prepayment of $300 million that we made in September. We're also pleased that S&P Global Ratings upgraded our corporate credit rating from B to B+. We continue to seek to bring down the leverage further with the JUSTI BIDOT expansion and plan to evaluate opportunities for further debt payments in the coming quarters. I will now walk you through our outlook before turning it over to Sudhakar for some final thoughts. I will start with our first quarter of guidance and then discuss our outlook for the full year. In formulating guidance, we are optimistic that the momentum behind our expanded product portfolio and enhanced go-to-market strategy, in addition to our strong install base and customer retention, will allow us to grow our top line in Q1 and the full year. That said, we are mindful of the macro headwinds which affects all areas of IT spending and have carefully taken into account FX and the impact of our subscription-first business model, transitioning and providing our outlet. Importantly, we've increased our focus on our expense optimization efforts and are committed to improving our already strong profitability profile in 2023. For the first quarter, we expect total revenue to be in the range of $177 to $182 million, representing a 1% year-over-year growth at the midpoint. Adjusted EBITDA for the first quarter is expected to be approximately $67 to $70 million. Non-GAAP fully diluted earnings per share are projected to be $0.15 to $0.17 per share, assuming an estimated 163.9 million fully diluted shares outstanding. And finally, our outlook for the first quarter assumes a non-GAAP tax rate of 26%, and we expect to pay approximately $6.8 million in cash taxes during the first quarter. For the full year, we expect total revenue to be in the range of $725 to $740 million, representing 2% year-over-year growth at the midpoint. Adjusted EBITDA for the year is expected to be approximately $290 to $300 million, representing a 5% year-over-year growth at the midpoint. As you will notice, we are now providing adjusted EBITDA guidance in lieu of the previously provided adjusted EBITDA margin aligned with our commitment to deliver EBITDA growth on a dollar basis in 2023. While we continue to manage our expenses prudently, we remain focused on our product roadmap, robust core execution, and subscription first strategy. We have made meaningful investments in our product portfolio and go-to-market strategy and believe that these investments are starting to pay dividends. We will continue to make selective investments to support our product innovation while prioritizing our commitment to improving efficiency and profitability. Non-GAAP fully diluted earnings per share is projected to be 69 to 74 cents per share, assuming an estimated 165.9 million fully diluted shares outstanding. Our full-year and first-quarter guidance assumes a euro-to-dollar exchange rate of 1.05 to 1. With that, I'll turn the call back over to Siddhartha for his closing remarks.

Thank you, Bart. The midpoint of the outlook Bart provided represents year-over-year growth, which reflects our continued belief in the relevance of our solutions, the execution ability of our teams, and most critically, the trust our customers and partners place in us. I'm very pleased with the momentum building for our new innovations, and I'm confident as ever in the long-term trajectory of our business. We continue to weather the economic conditions in a disciplined manner and make progress across several growth vectors. As we look to 2023, I'd like to iterate three key near-term priorities for us. First, we have a robust renewal business with over 90% renewal rates. We remain very focused on customer retention and expansion efforts as we have been for the past 18 months. Second, we continue to aggressively seek to drive subscription adoption across our businesses. While this has resulted and will likely continue to result in some variability in our reported revenue, The accelerated shift to subscription is consistent with how our customers want to consume our products and a key to our long-term strategy to achieve a billion dollars in ARR at mid-40s adjusted EBITDA margins in the coming years. We believe the increasing subscription base also provides an even more solid foundation for our revenue and margin expansion efforts. And third, We continue to exercise expense discipline in a challenging macro environment. As we begin 2023, we expect to continue to look for opportunities to invest selectively, manage expenses in a disciplined manner, and improve our operating margins. We have an experienced management team that has led companies through many economic cycles, and we have demonstrated consistent discipline with operational efficiencies while appropriately targeting our investments in attractive growth markets. We believe our resilient business model should allow us to deliver continued healthy levels of growth and profitability, and as you heard from Bart, we are focused on margin expansion, a guiding to $290 to $300 million of adjusted EBITDA for 2023. I'll conclude again by thanking our employees, partners, customers, and shareholders for their commitment to SolarWinds. Bart and I will now be happy to address your questions.

If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. Our first question comes from Matt Hedberg from RBC Capital Markets. Please go ahead. Your line is open.

Great. Thanks, guys, for the questions. Sudhakar, for you, one of the things that a lot of us are talking about, a lot of investors and users, are this whole idea of cloud optimization. You know, with your increased focus on observability, could you talk about maybe, you know, how your SME customers are thinking about cloud optimization? Is that impacting spend? Or maybe just a little call on that would be helpful.

Absolutely.

As I'm sure you've seen more broadly, there is definitely somewhat of a deceleration in cloud spend across public clouds. And here's where our hybrid cloud solutions have come in really handy because the way we designed the solutions was not force a particular deployment approach on the customer and instead give them a way where they can choose to deploy wholesale in the cloud, some in the premises, and extend it. So what that has allowed us to do is essentially pace their investments alongside the ability for them to evolve to the cloud. So that's come in really handy because ours is truly a hybrid solution. Now, in terms of cloud spend and overall observability itself, As part of our SolarWinds platform, we are also able to evolve it such that they can keep an eye on how their infrastructure spending is going in the context of infrastructure observability and optimization. But that's more of a future thing. The more immediate benefit that customers get is leveraging of the hybrid cloud observability, which has seen some really good traction in this environment. Got it. Thanks. And then, Bart,

You guys had good results, 4Q results relative to your guide and expectation. And I don't think you necessarily commented on linearity, though. Can you talk about – I mean, you guys have such an expansive view of a large customer base. How the quarter progressed? Obviously, it's back-end loaded, but maybe just spending patterns through the end of December and what you've seen through January? Yeah.

So, yeah, I mean, what I tell you, Matt, is that the fourth quarter, you know, for us is always our biggest quarter on the commercial side of that business. And obviously that happened again this year. From a linearity perspective, you know, the good thing is that our business model doesn't have the typical hockey stick. We have bookings progression throughout the quarter. And that held up this year just like it has in the past as well. So all in all, you know, it was a strong quarter for us from a revenue standpoint and from a booking standpoint. definitely compared to what the guide is that we gave back in the third quarter. So what I would tell you is that, you know, for us, you know, we're continuing to see improvement across the board. You saw that in our results as they trended throughout the year. And for us, from a seasonality standpoint, 2022 was just like every other year. We saw, you know, improved performance as we moved throughout the year.

Got it. Thank you.

Our next question comes from Eric Sipager from JMP Securities. Please go ahead. Your line is open.

Yeah, thanks for taking the question. First off, what should we be modeling for interest expense given the restructured debt? And then secondly, can you expand a little bit in terms of how we should be modeling for your cost reductions? Can you comment a little bit about what kind of further changes you've made? and how we should be thinking of OPEX growth from 22 into 23.

Eric, sure. Thanks for the question. I'll take this one. As it comes to interest expense, I'll model around $110 million of cash interest expense, and this is in line with how we refinance the debt and our base of financing. And also we have non-cash interest expense, as you may expect, as the debt falls to par, and we expect that to be, call it around $8 million to $10 million. But that's a high-level interest expense assumption. As it comes to expense optimizations to Bart's and Sudhakar's points, We will continue to be very prudent as it comes to our investments and be very selective. And we'll make sure we are making the right investments at the right places where we are expecting the highest return. So as we go through 2023, you may expect to see that same trend of expense management and prudence We will observe expenses very closely and just make sure we are making the right tradeoffs with focusing expanding our margin as well as. Edit the dollar.

OK, thank you.

Our next question comes from Patrick Schultz from Baird. Please go ahead. Your line is open.

Hey, guys. Yeah, thanks for taking my question. Just with the two observability solutions launched during 2022, it sounds like initial customer success has been pretty positive. Are you able to provide any customer stats around the success and what's embedded for expectations in 23? Then maybe just any color you can write on what types of conversations you're having with customers.

So we're not splitting out customer accounts and revenues at this point, but a large part of that is definitely implied in continued healthy subscription growth rates. As I mentioned on the call, they grew about 45% in Q4 relative to last year. That will continue to be a trend for us in terms of focus, and my expectation is that we demonstrate progress across both sides. And as I was mentioning to Matt's question earlier, the fact that we have hybrid cloud observability comes in really, really handy at times when customers may either be hesitant about cloud spend or let's call it a little bit more cautious than they were even in 2021 and 2022. So providing the optionality helps them a lot. And the way to think about our solution is that it's actually a continuum. While we may have introduced in two parts of the year, we'll be merging them such that customers have a seamless migration. Let's say they choose to have 100% SaaS at some point down the road, they will have the optionality to do that. What I will say is that customers absolutely love how we have packaged the solution for them. obviously priced it on a per node basis and the feature richness of it because they don't really have to buy a lot of tools or, in fact, are able to consolidate a lot of tools, including third-party vendor tools, to take leverage of our solutions.

Appreciate the call there. And then just on the international market, it seems like the macro environment in Europe is still impacting sales cycles and causing some increased deal scrutiny. But from an overall pipeline perspective, can you comment on any trends you were seeing throughout the quarter?

Yes, absolutely. The pipeline for us, including in Europe, has actually been quite robust and increasing. But the way we are modeling it in light of, call it the broader macro conditions and the extra scrutiny that you mentioned, is that we are assuming a lower pipeline conversion in our numbers than, let's say, would be the norm. But on the flip side, we continue to see significant demand represented by our pipeline increases.

Excellent. Thanks for taking my question, guys. Thank you.

Our next question comes from Sanjit Singh from Morgan Stanley. Please go ahead. Your line is open.

Thank you for taking the questions. I had some more kind of higher-level questions, sort of beyond the current macro environment. We've been talking a lot about the observability opportunity, and it's really nice to see you guys execute on the roadmap both this year on the hybrid cloud as well as the cloud-native solutions. But you sort of laid out in your investor presentation and in your script database performance monitoring as well as our service management. And I wanted to talk about those two opportunities in particular to Dr. How should we think about the contributions of those opportunities to your revenue growth profile over the next couple of years? Do you sort of see them as sort of incremental to the core observability opportunity, or do you think they could be really meaningful contributors in and of themselves?

First the latter, Sanjit. Thanks for the question. We look at them as meaningful individual contributors to the business. That's the reason why I do not, while observability is a very strong pillar of ours, including our erstwhile monitoring solutions, I like to think of it as we are participating in three growth markets with service management and database. And as of now, they are increasing, meaning the service management and database monitoring part of our business are robust growers. And because of the size that they have currently, you will not see the full impact of their growth rates. That being said, the way to think about this as we move forward, is that as the SolarWinds platform itself matures, a lot of the functionality will ride on the same platform. So, for instance, when we think about observability and we talk about database observability as an element, that comes out from the innovation of our database team. Similarly, we'll integrate automation and remediation with observability. and that's contributed by the service management team. So there is a standalone motion, as you know in the market, as well as a more integrated motion, which is why I'm excited about how our observability solutions will be very differentiated than, let's say, simply observing and reporting.

Understood. That's very interesting. Also in your investor deck, you have sort of – some preliminary initiatives and goals for the team in 2024. And one of them was around product-led growth, which in some ways I kind of thought of SolarWinds as sort of an early pioneer of product-led growth. I guess it's been executing an online digital sales model for well over a decade now. Can you talk to a little bit about a little bit about what you sort of need in 2024 about moving into product-led growth. What are the aspects from a capability standpoint you're looking to build that you don't necessarily have today?

Absolutely. So that's a good call-out, Sanjay. It's more of an evolution slash extension. You're right about saying Solovance historically has been in many ways a product-led growth company in the broad connotation of product-led growth. And broadly speaking, we used to call the motion download, try, and quote. So that is how the whole velocity motion was nurtured. The way to think about this in this evolution is the download, try, and quote motion essentially become a try and buy with greater embedded technologies to both create demand and prompt demand with customers. So think of our velocity motion accelerating, leveraging newer technology paradigms as opposed to a completely new paradigm being created.

Understood. Thank you very much, Siddharth. Thank you, Sanjay.

Connor Passarella from Truist Securities. Please go ahead. Your line is open.

Oh, perfect. Thank you. Good morning, guys. This is Conrad for Terry Tillman. Just maybe we wanted to start also with a more high-level question. So just as we think about the long-term targets of achieving $1 billion in ARR and mid-40 EBITDA margins, if we grow ARR 10%, it takes about five years to get there. Then if we grow it about 5%, it takes around 10 years. Just as we think about these long-term targets, where do we think in reality these will kind of shake out?

Maybe closer to the five-year, 10-year mark? Just any call around this would be really helpful.

Yeah, good question, Connor. I mean, when we're thinking about it, you know, We originally talked about having a target of those numbers in 2025. We need to see some acceleration in revenue, which we saw in the back half of the year. So if that trend continues, then we think these are targets that we think we can hit in the next five or six years. Definitely not thinking about it on a 10-year horizon. We need to see more acceleration on the top line, and then you'll see us deliver the targets that we're talking about.

And, Connor, we have taken or absorbed the impact of subscription transition in both 2021, I should say, 22 and 23, and we continue to do that. But as you can imagine, that also has a compounding effect as we get into the out years. And so I don't believe that is fully internalized, absorbed, or modeled yet. And that's the reason why I think the time horizon is nearer rather than farther.

Got it. Okay. Yeah, that makes a ton of sense.

Maybe just as a quick follow-up, we saw the announcement a couple months ago of Chad Rees being appointed as the president of America's sales and global channel.

Maybe just any progress report on getting him ramped up on the SolarWinds platform. Thank you, guys. Yes.

So Chad's been here now for almost six months. And he's, I would say, fully up to speed and, in fact, on the road to meet our global channel partners in EMEA and APJ very shortly. So he and his team not only have been driving, call it, the cadence around our partner program, but also scaling our America's business and really supplementing our high-velocity motion with what I would call selective high-touch motion, because we see increasing opportunities, as I noted in the script, as well as getting our partners more excited about our future and the possibilities that we offer them, because there's a lot of opportunities for partners to engage with SolarWinds Solutions and become even more profitable than they previously were.

Thank you.

As a reminder to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from Cash Rangan from Goldman Sachs. Please go ahead. Your line is open.

Hello, Sudhakar and Bart. Nice to talk to you guys. If you can offer a perspective on your subscription transition and are there incremental tweaks to the subscription product offering that should incentivize the customer to to move away from your big install base of licenses. And also commentate with that, are there things that you're doing on the go-to-market side to sweeten up the incentive? So from the product side, from the go-to-market side, what are the things that you could do to accelerate this transition? And also, if you have a view on the maintenance fallout, the folks that are not converting to subscription, what are they doing? Are they just sitting out to wait for a certain level of proficiency with the subscription options so they can jump on board or anything, any other dynamics. Thank you so much once again. Good to connect with you guys.

Thank you, Cash, and always good to hear your voice. Both the entire set of questions are very relevant and something that we have been actively working on. Number one is that, as I mentioned, the hybrid cloud observability product was introduced in April with another extension in July and further in October. What I can say, Cash, is that our first focus was to ensure that customers saw both value in feature richness as well as the simplicity of pricing and packaging. So we evolved the whole thing to node-based pricing, which gives great pricing flexibility for our customers. And so that has been a significant reason why customers have been evolving. So the approach that we took was instead of stopping one model and starting with a new one, we decided as maintenance renewals come up for expiry is when we position and pitch hybrid cloud observability to our customers, and we have used that as the motivation to transition. And there I would say the conversion rate shows have been very high, and even though it is less than a year since we introduced the product line, we've seen steady and accelerating progress. all through uh 2022 and my expectation is that it will continue in 23 and this is an opportunity for us as you know we have a very large install base and a a growing install base as well but this can be a multi-year growth opportunity for us is the way we are thinking we have also on the other side to your point about go to market given or incentivized both our partners as well as our salespeople to position that harder and better because of the value proposition. And finally, what I'll say is that as we've converted maintenance to subscription, we are also experiencing meaningful revenue multiples on that, which, as you know, will have a compounding effect as we get into 23, 24, and 25 and beyond.

And also, if I could follow up on the observability side. So, Dr., are you observing in the observability markets a tighter coupling of the trends that are seen in the public cloud vis-a-vis decline in consumption? Or do you think there's more of a secular growth story for this particular product? Is it still in its early phase or somewhere in between? That's it for me. Thank you.

Yeah, absolutely. So both hybrid cloud observability, which is what I just described, Cache, as well as our call it the SAS observability solutions are complementary and supplementary from our standpoint. And the approach that we have taken is because we are able to do a lot of tool consolidation, especially in this macro environment, it becomes even more compelling to them as we bridge, call it the premises, to the cloud. In terms of how customers are viewing our solutions, it is a combination of helping them optimize costs at one level and increasing productivity at another level. So it's more of a must-have product as opposed to a nice-to-have offering. And going back to one of the previous questions, by integrating service management onto the same platform, we're able to give them even more efficiencies from an overall deployment standpoint. So this is a long-term secular growth trend, in my opinion, both in the context of three distinct served markets as well as a more unified served market as well.

We have no further questions in queue. I would like to turn the call back over to Dr. Ramakrishna for closing remarks.

Thank you very much. Thanks again for everyone who joined our call and for your ongoing support. We are very excited about the prospects at SolarWinds and will continue to execute and continue to report out on a regular basis.

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