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.