SolarWinds Corporation

Good morning and welcome to the SolarWinds second quarter 2023 earnings call. My name is Brianna and I will be your conference operator today. Please note that this call 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, please press star followed by the number one on your telephone keypad. To withdraw your question, again press star one. I will now turn the call over to Tim Karraja, Group President of Finance. You may begin your conference.

Good morning, everyone, and welcome to the SolarWinds Second Quarter 2020 Earnings Call. With me today are Sudhakar Ramakrishna, our President and CEO, and Bhatt Kalsu, our CFO. Following our 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. 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, our expectations regarding our partner ecosystem, 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 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 filing with the SEC. Copies are available from the SEC on our investor relations website. 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, as well as a definition of other financial metrics discussed on today's call, are available in our earnings press release and summary slide deck on the investor relations page of our website. Finally, we note that 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 be final once we file our quarterly report on form thank you. With that, I will 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 thank our employees, customers, partners, and shareholders for their ongoing commitment to SolarWinds. We had another strong quarter, building off the momentum we saw at the end of 2022 and into Q1 and positioning us well as we look to the second half of the year. I attribute the results to our broad portfolio of solutions, the compelling value we deliver to customers, the resiliency of our business model, and our continued execution of our priorities. Second quarter highlights include strong subscription revenue and ARR growth demonstrating the compounding positive effects of our subscription first strategy. Growing contribution from our observability solutions in addition to growth in our service management and database monitoring product lines. Continued solid customer retention demonstrating the value proposition and stickiness of our solutions. And double-digit year-over-year adjusted EBITDA growth along with increased margins highlighting the operating leverage in our business and our commitment to expense and operating discipline. 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 Q3 and the full year 2023. In Q2 2023, we delivered total revenues of $185 million above the high end of the guidance range to be provided and representing a 5% increase year over year. We are seeing the benefits of our subscription first transformation and delivered second quarter subscription revenue growth of 44% and subscription ARR growth of 33%. As I've said before, our evolution to subscription is not just a business model change, but a way of delivering greater value to customers. Now that we are over a year into this transformation, we continue to see the benefits of this evolution. In Q2, our in-quarter maintenance renewal rate was 93%, and our trailing 12-month renewal rate is now 94%. The trailing 12-month rate continues to be the highest since Q4 of 2019, showing continued improvement and reflecting the value of our solutions. We ended the second quarter of 2023 with 933 customers who have spent more than $100,000 with us in the last 12 months, an increase of 6% over the comparable period in the previous year. We are increasingly helping customers accelerate business transformation initiatives while improving productivity. In doing so, our customers continue to grow with us. Adjusted EBITDA grew 18% year-over-year to $79.1 million, representing an adjusted EBITDA margin of 43% and above the 69.5 to 72.5 million outlook we gave for the quarter. Turning to some business highlights this quarter, I want to focus on a topic I'm sure is on many of your minds. artificial intelligence, or AI, and highlight some recent industry recognitions, our SolarWinds Day Secure by Design event on Capitol Hill, and our brand refresh. In prior calls, I described our AIOps capabilities. We have invested in AI-powered solutions for over two years and believe customers have been experiencing improved productivity and security by leveraging our AIOps innovations. We believe SolarWinds is uniquely positioned to enable ITOps and DevOps teams to leverage AI-based technologies for many use cases across applications, networks, infrastructure, users, devices, and databases. AI-driven solutions will play an increasingly significant role in enabling customers' teams to accelerate the time to value and reduce the time to detect and remediate issues in their environments. We are developing new solutions designed for advanced DevOps, and platform engineering teams we believe will uniquely transform how organizations respond, manage, and resolve incidents. We are integrating our observability solutions and elements of service management to deliver these benefits to customers. In May, we announced the addition of transformative artificial intelligence and machine learning capabilities to our ITSM solutions. The new AI features include a service desk AI virtual agent designed to answer user questions and troubleshooting. This is intended to reduce ticket volume by enabling users to remediate easier to solve issues such that IT practitioners can focus on more complex problems requiring their expertise. In addition, SolarWinds was ranked as a strong performer in the recent Forrester Wave report for process-centric AI for IT operations published in June. Our AI capabilities are just one example of how we continuously evolve SolarWinds platform for our customers as they accelerate their digital transformation, drive automation, modernize applications, and undertake cloud migration initiatives all while reducing costs. In recent months, we have received awards for our innovations across our offerings portfolio and go-to-market enhancements. I also want to spotlight the role SolarWinds plays in addressing cybersecurity. This quarter, we held our SolarWinds Day Secure by Design event in conjunction with Congressman Daryl Iza, Congressman Raja Krishnamoorthy, and CISA's Executive Assistant Director for Cybersecurity, Eric Goldstein. During the event, we showcased the importance of public-private collaboration in securing our common infrastructure from cyber risks. I'm encouraged that the industry continues to become aware of and adopt the Secure by Design principles we established in early 2021. Our next generation build system, a key component of Secure by Design, was recognized by the 2023 Big Innovations Award and Cloud Security Awards. The Cloud Security Awards judge stated this cutting-edge technology sets a new standard for excellence in the industry. Separately, we announced that our next-generation build system aligns with the National Institute of Standards and Technology, NIST, guidance for secure software development. In this regard, we are an early trendsetter leveraging our secure-by-design principles. This includes aligning our software development processes with NIST's Secure Software Development Framework, SSDF. and CISA's enduring security framework as outlined in the National Cybersecurity Strategy. While CISA will set the formal guidance for how software vendors self-attest to the SSDF later this fall, we believe we are ready today. Lastly, we recently announced a new, refreshed logo and brand to signify our ongoing evolution portfolio expansion, and customer empowerment. As the challenges our customers face have evolved in recent years, and as the increased use of artificial intelligence has resulted in increasingly complex hybrid and multi-cloud environments across industries, we now serve a broad customer base across IT ops, DevOps, SecOps, and CloudOps teams. Our new brand reflects our brand transformation, which has made us better equipped than ever to enrich the lives of our customers with simple, powerful, and secure AI-based solutions that help improve productivity and reduce costs. Now, I'd like to remind you of the priorities we laid out for 2023 and to discuss our progress towards these priorities. We believe IT environments continue to grow in complexity while budgets remain constrained, and therefore, customers value solutions that improve productivity and lower costs. I believe our comprehensive observability, service management, and database products and services are ideally suited to address these growing challenges. It remains my belief that 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, our key near-term priorities are as follows. First, we continue to seek to drive subscription adoption across our business which is seen in our strong subscription revenue and ARR growth results. We believe this is consistent with how our customers want to consume our products and that an increase in our subscription base provides an even more solid foundation for our revenue and margin expansion efforts. we continue to exercise expense discipline in a challenging macro environment by investing selectively while managing costs and improving our operating margins as reflected in our 18% adjusted EBITDA year-over-year growth in Q2. Third, we remain very focused on customer retention and expansion efforts as evidenced by our improved renewal rates. And fourth, we continue to innovate on our SolarWinds platform organically and with our expanding ecosystem to bring even greater value to our customers. The AI capabilities and Secure by Design efforts I spoke about a moment ago are excellent examples of our progress. With that, I'll turn it over to Bart to expand on our financial performance and provide Q3 and an updated full-year outlook. Bart? Thanks, Sudhakar.