SolarWinds - Q1 2021

Transcript

Speaker 0

Good day and thank you for standing by. Welcome to the SolarWinds First Quarter 2021 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Howard Ma, Senior Director of Investor Relations.

Please go ahead.

Speaker 1

Thank you, Sumner.

Speaker 2

Good morning, everyone, and welcome to SolarWinds' 1st quarter 2021 Earnings Call. With me today are Sudhakar Ramakrishna, our President and CEO Par Kalsu, our EVP and Chief Financial Officer and John Halukka, EVP and President of Enable. Following prepared remarks, we'll have a brief 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 Q1. Please

Speaker 3

remember that

Speaker 2

certain statements made during this call are forward looking statements, including those concerning our financial outlook, the impact of the cyber incident on our business, our market the impact of the global economic environment on our business and the updates of the potential spin off of our naval 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 also subject to a number of risks and uncertainties, including the numerous risks related to the cyber incident and a potential spin off of our Enable business. Additional information concerning these statements and the risks and uncertainties associated with them is highlighted in today's earnings Conference 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. With that, I will now turn the call over to Sudhakar.

Speaker 3

Thank you, Howard. Good morning, everyone, and thank you for joining us today. I hope you are doing well and staying safe. I want to start by first thanking our employees, customers, partners and And our shareholders for their ongoing commitment to and for their support of SolarWinds. I've completed My first full quarter at SolarWinds and I am energized and inspired as I witness firsthand the tremendous dedication that our employees have to customer success, the competence, commitment and attitude displayed to execute On our Secure by Design initiative and to deliver demonstrable results, the commitment and trust our customers and partners place in us, Something we deeply cherish and do not take for granted as we accelerate our journey to help them transform faster in an increasingly hybrid IT world.

I continue to spend a lot of my time with our employees, customers and partners, Whereas the conversations earlier in the quarter were largely about the cyber incident itself and what happened, increasingly, The conversations are much more focused on what have we learned and how can we apply what we have learned to ensure the safety of our environment and those of our customers. In this regard, our Secure by Design initiatives are enabling us to have conversations with customers, thereby bolstering our relevance to them even further. I'll expand on this in a minute. With respect to the cyber incident, we are also coming to the end of our investigation And we'll continue to provide updates as we conclude them. I will now touch on a few financial and operational highlights in Q1.

Our teams did an excellent job of maintaining focus on delivering customer success. Our partners played a pivotal role as we executed the Orion assistance program in support of our customers. For the Q1, we delivered revenues well above the high end of the range of our outlook, with the total non GAAP revenue Ending the quarter at $257,000,000 representing year over year growth of 33%. 1st quarter adjusted EBITDA was $106,500,000 representing an adjusted EBITDA margin of 41%, exceeding the high end of our outlook for the Q1. Our Q1 core IT management maintenance renewal rate of 87% is higher than the low to mid-eighty percent renewal rate we noted we expected in 2021 when we discussed our full year results in February.

We continue to focus on customer retention as a key priority and hope to grow back to our historical and best in class renewal rates of over 90%. Our largest customers renewed with us while also increasing their license count. We have also seen other customers, including those in the federal sector, expand their Investments with SolarWinds in the Q1. We see these wins as validation of our team's proactive and sustained efforts to deliver industry leading solutions that are not only powerful and affordable, but also Thank you. Enable business again delivered double digit 13% revenue growth in Q1 And we continue to expand our portfolio in support of our MSP partners and SME customers.

Given the potential spin off of this business, John Taliuca will provide a business update on this call. We are accelerating our momentum in the database monitoring segment with the formation of a dedicated core team to help us capture what we believe is a large and growing market opportunity of over $6,000,000,000 We were recognized by Gartner In the Magic Quadrant for application performance monitoring, another pillar of future growth potential for us alongside our database monitoring business. We expanded our offerings in Q1 as we continue to evolve to a full stack observability company that Helps accelerate the digital transformation needs of our customers via an integrated platform with automation, Monitoring, Alerting and Remediation Capabilities Leveraging AI ML Techniques on a Unified Cloud Platform to Support Hybrid IT Deployment. We expanded our management team with appointment of Andrea Webb as our Chief Customer Officer, Tim Brown as our Chief Information and Security Officer and Rohini Khat Suri as our Chief Product Officer. Additionally, Jason Glitz assumed the role of Chief Administrative Officer Key management members to the Enable business, including a Chief Technology and Product Officer Ajayi Carlson, Chief Customer Officer and Chief People Officer as Enable prepares to operate on a standalone basis.

Now let me turn to an update on our Secure by Design initiative. The recent cyber incident against SolarWinds, other widely used technology providers and our and their customers is a concerning new reality for the software industry. This represents The increasingly novel and sophisticated actions used by outside nation states on the supply chains and infrastructure Real Time Information. SolarWinds is committed to sharing our learnings about this attack broadly given the common development practices To help lead an industry wide network that we believe will position SolarWinds as a model for secure software environment, development processes and products. In fact, this is increasingly the topic of discussion as I engage more closely with our customers and Partners.

Over the past 3 months, our IT, product and development teams have been committed We are implementing a series of actions that are designed to further enhance the security of our environment and systems against attacks, including adopting least privileged access mechanisms and addressing further potential risks associated with 3rd party applications access. We also recognize that our security posture and procedures are dependent on the people So we are investing in additional rigorous security training for our employees. Our initiatives We see these initiatives and investments as being consistent with our goal of being a best in class provider of powerful, affordable and secure solutions. Now let me turn the call over to John to provide an update on the Enable business. John?

Thank you, Sudhakar.

Speaker 1

I'll come in the next 5 minutes giving updates on the Enable business and first quarter performance. I'm excited to announce that in Q1, we completed the rebrand of Enable across our platform solutions, new websites and partner community sites. Also on April 14, we opened Analyst Day for Equity Analysis. I want to start by recapping some key points from our presentation. First, the market opportunity for Enable starts with small and medium enterprise IT spending, which is over $1,000,000,000,000 globally and growing.

SMEs deal with nearly as much IT complexity as larger enterprise, but IT management security are not the core competencies of most SMEs. As a result, SMEs have increasingly turned to MSPs to be their trusted partner through their digital evolution. And in turn, MSP is a Technologies that can effectively address SME customer needs. Using our purpose built software platform, MSPs are able to not just build successful service offerings, but also play an increasingly important role in shaping SME IT spending decisions. We believe the market opportunity for our software solutions is approximately $23,000,000,000 and expected to nearly double by 2025.

2nd, why do we win? We win because we're architected to the MSP to enable them to effectively scale their businesses and our purpose built across 3 pillars. The first is our margin breadth and depth, which has always been a strength of both Enable And SolarWinds, our MSP partners that live in our platform day in and day out rely on the centralized views and alerts we provide on 100 of 1000 In Q1, we expanded our monitoring depth. We went GA with our Microsoft Intune integration, allowing MSP partners perform in tune device management functions directly with the Enable platform. We also extended our iOS device coverage to map workstations, adding remote access capabilities into additional types of network devices.

Our second area of strength is our data protection and security solutions, which are fully cloud based and seamlessly delivered via our RMM platform and give our MSP partners a truly layered approach to protecting their customers. In addition, because our platform gives our partners access into end customer environments, the security of our platform is extremely important. In light of the secure by design initiatives that Sudhakar has discussed in detail, we have and continue to implement end product security enhancements to our enabled products such as multi factor authentication, single sign on and SSH for network devices. 3rd, We offer, we believe, our best in class partner success resources that train our partners on how to improve technician efficiency, build stronger books of business And become better business operators. This helps drive retention and expansion on our platform.

We look forward to hosting Our global Empower event later this quarter and the discussions we'll have with our partners on industry trends and how to solve the challenges they face. As we strive to become standalone Rule 50 company with the heavier lean towards growth, following the potential spinoff transaction, I I want to highlight a unique aspect of our growth model called partner enabled expansion. We grow when we add new MSP partners and help our MSP partners grow. That's the fuel that propels the model. After landing a partner, we grow when the partner adds new technicians that use our Cell 2 solutions.

More significantly, we grow when the partners add new SME customers And when those SMEs had employees and devices under management, we grow again when our MSPs deliver additional solutions powered by our platform. This is the power of our sell through model and also the biggest driver of our net retention rate. Through this partner enabled activity, our partners essentially act as an extension of our sales force. Turning to Enable's Q1 performance. We delivered a solid 13% total revenue growth and 15% subscription revenue growth, especially considering a couple of headwinds worth noting.

1st, after the cyber incident at the end of December, we slowed our command generation and sales activity, which impacted new partner additions expansions in January February before returning to more normalized levels in March. 2nd, the The continuing impact from COVID, which we began to experience during Q2 of last year, remains a modest year over year headwind, although the impact on our subscription We're cautiously optimistic about improving conditions for the balance of 2021. As we provided in the Analyst Day presentation, Our outlook for Enable revenue growth is approximately 14% in Q2, an improvement over Q1 and 12% to 14% growth for the full year assuming the spin occurs for the coming months. We are making investments for growth in R and D, international go to market and partner success That we believe will position us for growth acceleration as we exit 2021. We remain excited about the plans we have enabled, which we're still targeting to complete for the coming months.

With that, I'll turn it over to Bart to provide more details on our financial performance and outlook. Thanks, Thanks, John, and thanks again to everyone joining us on today's call. Our Q1 financial results reflect solid execution while demonstrating the resiliency and sustainability of our model. We had a much better quarter than anticipated and finished well above the high end of the range of our outlook for the Q1 with total non GAAP revenue ending the quarter at $257,000,000 representing year over year growth of over 3%. Total Enable revenue was 83,000,000 Representing growth of 13%.

John just talked about what is driving that piece of our business. In total, our core IT management revenue was 174,000,000 Total license and maintenance revenue was $147,900,000 in the 1st quarter, down 3.5% versus the prior year. Maintenance revenue was $123,000,000 in the Q1, up 6% versus the prior year. We typically disclose the maintenance renewal rate for our perpetual license products on a trailing 12 month basis. Our Q1 trailing 12 month rate was 91%.

However, given the heightened focus on smaller windows of performance since the cyber incident, we want to provide the end quarter renewal rate for Q1, which was approximately 80 7%. This exceeded our expectations for renewal rates in the low to mid-eighty percent range throughout 2021, which we provided on our last earnings call. In addition, we expect this renewal rate of 87% to increase by a few percentage points based on quarter license revenue was $24,900,000 which represents a decline of approximately 33% as compared to the Q1 of 2020. The decline in license revenue is a result of the combination of the impact of the cyber incident, the continuing impact of the COVID-nineteen pandemic and our continued evolution to subscription sales for our on premises products. Our on premises subscription sales resulted in approximately 2 percentage point headwind to our license revenue That said, we believe that the Q1 should be the most negatively impacted as it relates to the year over year growth.

We substantially halted our demand gen activities from December through the early parts of the Q1 as we focused our efforts on assisting customers. We believe this negatively impacted our new license bookings in the Q1 and in the early portion of the quarter in particular. We saw acceleration in our business as we move throughout the through the Q1 and we are working to continue that trend as we move through the rest of the year. Looking ahead, we expect to continue to have near term headwinds on our business. Total ARR reached Approximately $961,000,000 as of March 31, reflecting year over year growth of 12%.

Subscription ARR grew 13%, reaching $438,000,000 at the end of the quarter. Moving to our subscription revenue. 1st quarter non GAAP subscription revenue was $109,100,000 up 15% year over year, which was driven by enabled 15% year over year subscription revenue growth as well as solid performance in core IT management subscription revenue. Our land, expand and retain model has successfully driven sustained growth in our customer relationships. We finished the Q1 of 2021 With 10 74 customers that have spent more than $100,000 with us in the last 12 months, which is a 16% improvement over the previous year and 17 more since year end.

We are continuing our efforts to build larger relationships with our enterprise customers. We also had a solid quarter of non GAAP profitability in the Q1. 1st quarter adjusted EBITDA was 100 and $6,500,000 representing an adjusted EBITDA margin of 41%, exceeding the high end of the outlook for the Q1. Unlevered free cash flow for the Q1 totaled $51,000,000 Excluded from EBITDA and unlevered free cash Our one time cost of approximately $20,000,000 including $10,000,000 of spin off related costs and $10,000,000 of cyber related remediation, containment, payment, investigation and professional fees, net of insurance proceeds. I do want to clarify that these cyber related costs not included in adjusted EBITDA are one time and non recurring.

They are separate and distinct from the $20,000,000 to $25,000,000 of Secure by Design initiatives, which are aimed at enhancing our IT security and supply chain process. These costs will be part of our recurring cost structure on a go forward basis. We expect one time cyber related costs to fluctuate in future quarters, but to be less in future periods than the amount incurred in the Q1. These one time cyber costs are however difficult to predict. They not only include the significant cost of the forensic investigation efforts that we are expecting to conclude in the near future, But also costs associated with our ongoing litigation, government investigations and potential judgments or fines and related professional fees.

We expect our insurance coverage to offset a portion of these expenses. We expect our one time spend related costs to following the completion of the spin off, which we are targeting to complete in the coming months. Net leverage at March 31 was 3.2 times

Speaker 3

I will now walk you through our

Speaker 1

outlook before turning it over to Sadhakar for some final thoughts. While ongoing customer renewals and pipeline growth are indicators of the health of our business, there is still enough uncertainty around the impact of the cyber incident On top of the continuing impact from the global pandemic that we feel it's still too early to predict a range of outcomes with the level of precision that we have provided in the past. As such, we believe it is prudent to only provide Q2 of 2021 outlook for total revenue, adjusted EBITDA and earnings per share. For the Q2 of 2021, we expect total non GAAP revenue to be in the range of $254,000,000 to $258,000,000 representing year over Growth of 3% to 5%. Adjusted EBITDA for the 2nd quarter is expected to be $102,000,000 to $104,000,000 which implies an approximately 40% adjusted EBITDA margin.

As a reminder, our adjusted EBITDA margin is being impacted incremental spending associated with the Secure by Design initiative that we began implementing in the Q1 as well as the growth initiatives that John and Enable team for executing in anticipation of the potential spin off. Non GAAP fully diluted earnings per share is projected to be $0.21 per share, assuming an estimated 319,600,000 fully diluted shares outstanding. And last, our outlook for the 2nd quarter assumes a non GAAP tax trade of 22% and we expect to pay approximately $22,000,000 in cash capital during the Q2 of 2021. While we are not providing consolidated full year outlook, I will say that we continue to expect license performance to improve versus Q1 as we move through the year in all regions. Based on what we've seen so far in the Q1, we expect that maintenance renewal rates will be in the mid-80s for the rest of 2021, and We are targeting to return to historical performance in 2022 as we work with our customers to ensure their security and success and as we continue to further enhance our product portfolio.

Increasing the percentage of our recurring revenue has been a focus over the past 5 years and recurring revenue is now at 90% of our total revenue. We intend to continue to expand the subscription offerings of our on premises products in 2021 and make new subscription sales a priority with our sales team. And finally, with respect to our conversion of adjusted EBITDA to free cash flow, our rate for the Q1 was well below our historical trend. The conversion rate was negatively impacted by lower license and maintenance renewal bookings. The ongoing revenue mix shift to more subscription As well as annual bonus payments, which are seasonally higher than the Q1.

We expect our conversion rate for the full year to be above 70% and And grow to the low 80% range in 2022. With that, I will turn the call back over to Sadhakar for his closing remarks.

Speaker 3

Thank you, Bob. Our team's confidence, commitment and attitude was evident as we delivered a strong Q1 performance and delivered results exceeding our outlook in both revenue and EBITDA. I'm confident that our continued focus on customer success will make us even more relevant as we evolve our platforms and serve the evolving hybrid IT needs of our customers. We expect automation and configuration, monitoring, visibility, alerting and remediation. These moves will We further accelerate our progress towards a greater mix of subscription and recurring revenue.

For the remainder of 20 21. Our focus will continue to be on executing on the initiatives that I outlined during our Q4 earnings call, focusing on customer retention and demonstrating ongoing progress in subscription, license and maintenance growth across of all geographies and sectors. I'll conclude by again thanking our employees, partners and customers for their commitment to and support of SolarWinds. We hope to continue to demonstrate progress in customer attention, license and maintenance growth John, Bart and I will now be happy to address your questions.

Speaker 4

Operator, we are ready for questions.

Speaker 0

Your first question comes from Matt Hedberg of RBC Capital Markets.

Speaker 5

Sudhakar, I wanted to start with you. Now we do have some distance Now between the breach and where we are today. I wanted to dig into a little bit about both The renewal and the new business side, obviously 87% in quarter renewals were really nice to hear given where expectations were coming into the year. But Are you hearing any customers, both existing or potentially new customers that are unwilling to look at SolarWind products now following the breach? Just a bit more detail on that would be helpful.

Speaker 3

Sure, Matt. As I mentioned in my prepared remarks, I spent a lot of time with customers across geographies as well as base sectors and sizes. The way I would describe it is that customers definitely want to understand what happened. And like I mentioned earlier in the A lot of the questions were around what happened with the security incident. Now I would say there's a level of that customers appreciate that what's happened from a security breach standpoint to us could happen Not just to them, but also see a lot more of the vendors coming out and speaking about breaches that are going on in their Including some very large vendors, as you know.

So that doesn't become the main topic of discussion and instead it's about the portfolio, The value proposition and things like that. So I haven't seen examples of customers saying that They don't want to evaluate us. In fact, I would say that more and more of them are doing so. And increasingly, what I find is that we are having broader conversations. So whereas previously we may have had a discussion with, let's say, a networking engineer.

Now we are having discussions with the CIOs and the CECLs. So that gives us the opportunity to have more relevant and more strategic conversations with them.

Speaker 1

Got it. That makes a

Speaker 5

lot of sense. Super helpful. And then, Bart, You didn't provide a full year outlook, but you did give us some detail on some incremental cyber costs. Are there any other puts and takes that we should be thinking about? I guess I'm thinking specifically on the margin side as we move throughout this year.

Speaker 1

Yes. Q1 EBITDA margin was a little over what we'd originally expected, Matt. And so I think it came in close to like 41%. We're still we still have a lot of some headwinds that we're facing in the Q2. If you look back at our historical performance.

Margins tend to rise in the back half of the year. A lot of that is because of the increase in revenue in the second half of the year for us. We don't like to talk about seasonality, but Q3 and Q4 are typically better quarters for us from a license revenue standpoint. And if that's This year, then we would expect our margins to improve in the back half of the year as well. Got it.

Thanks a lot, guys. Thanks, Matt.

Speaker 0

Your next question comes from Sterling Auty with JPMorgan.

Speaker 5

Yes. Thanks. Hi, guys. So, the incremental cost that you're incurring for security operations, etcetera, You mentioned so the portion that you mentioned that will need to continue, which is understandable. I'm just curious, Is there going to be leverage in that level of spend?

Meaning, is this the level that you will need To maintain or is there a variable component that will grow over time and maybe permanently impair margins to some degree?

Speaker 1

Yes, Sterling. Really the $20,000,000 to $25,000,000 it's not going to scale with our revenue. It's fairly stagnant as far as what the costs are going to be on a go forward basis. There's a few things like penetration testing and a few things like that that are in that footprint increases over time, but it's not going to scale with the rest of our business.

Speaker 5

Great. And then when you look at the improvement in new customer or new purchases, Are there particular parts of the product line that are rebounding first? And is there anything within the product line that you're Finding still lagging because of kind of hangovers from the breach.

Speaker 1

From a product standpoint, Sterling, we saw the light where you would see that is in our license revenue. And obviously, we talked about the Q1 being our toughest quarter in 2021. And really it was pretty much across the board as far as what was down year over year. Obviously, the Orion product portfolio was the most scrutinized, From a product standpoint, it was really just across the board. Got it.

Thank you.

Speaker 0

Your next question comes from Rob Oliver of Baird.

Speaker 4

Great. Thank you. Good morning, guys. Two questions. First for Sadhakar or for Bart.

Just a little bit on the slower license growth This quarter maintenance obviously, it did pick up. Bart, you had said in the prepared remarks that you making a subscription a priority for the sales team. So just wondering as you guys approach customers on renewals, I know The goal has not been to convert folks to subscription,

Speaker 3

but have there been some

Speaker 4

changes, Sudhakar, since Maybe your arrival about the approach to subscription and has that proved to be a bit of easing perhaps some of The barriers perhaps to renewal with some of your customers and is that happening in core IT as well as in the SaaS portfolio. And then I had one follow-up for John.

Speaker 1

Hey, Rob. First and foremost, As you said, for our existing customers, the maintenance renewal is more attractive from a financial standpoint. So we're not seeing a hard shift of our existing customer base to go from maintenance to subscription. The subscription sales of our on premise products are all And that's still the case today. What we have done is starting with our database product portfolio of products.

We're making that a priority from a subscription sales standpoint. As we move harder into that Market, especially with the CenturyOne acquisition. We're making that our initial on premise subscription product that we're focusing most on. And really as we move into the second half of the year, I think that's one of the areas that Sudhakar may make a priority for us.

Speaker 3

Just to be imposed on that point, we don't want to make unnatural moves, so to speak, on that front. And there are some very logical opportunities for us to translate more and more into subscription as Bart mentioned, specifically with the database portfolio. And as we explore additional packaging options and integration options for our portfolio in the back half of the year, But most of those proof of indicators are a function of delivering more functionality and value to customers. And then in that context, also offering a greater leading to a subscription even as we train Yes. More of our sellers in that context, we do have additional, call it, incentives for our sales teams to sell And that is something that we'll continue to amplify.

Speaker 4

Okay, great. That's really helpful. Thank you, guys. And then, John, I had one follow-up for you. Just a couple of weeks here removed from the sell side event that you guys did and really appreciate all the color.

I know there were some puts and takes at least from the Sales community around kind of profitability profile versus growth. It does sound particularly given the TAM expansion here, I think doubling through 2025 like there is meaningful growth opportunity along with, I think, as you guys said, desire to be a rule of 50 company. Just stepping back now, could you maybe just kind of frame how you're thinking about that, Obviously, without providing any specifics, you can't, but how you're thinking about that kind of growth and diverse investment profile? And if Any change in recent weeks as things, I know, start to get a little bit better and you're emerging from some

Speaker 1

of the COVID impact? Thanks.

Speaker 3

Yes. Thanks, Rob.

Speaker 1

As I outlined in the prepared remarks, we're going to continue to increase investment across 3 areas of R and D, International sales and customer success. Each of those have a different return horizon. If you think about it, our international We're investing there to win some larger MSPs in other parts of the world and also begin Clariflag via some of our channel partners. I expect those to have a shorter return. And we're actually starting to see progress And those geographies already.

So that was out the shorter return. The second one around customer We continue to add resources and technology and processes to help our MSP partners grow their business And for them to add services, for them to add customers in a

Speaker 4

scalable way, that I'd say is

Speaker 6

a little bit more of

Speaker 1

a medium term return Because we have to help them grow as they grow, we grow. And then the last one around product, as Sudhakar mentioned, we brought on Our new CTO, Chief Technology and Product Officer, and he's looking at a bunch of different ways for us to improve the scalability of our platform, but also how to add services that help these MSPs at a little bit of a faster So as you think about it from a product strategy point of view, we have 2. 1 is we're going to continue to expand our surface area on We can monitor and we demonstrated that this quarter with the adding of the Intune integration. And the second one is adding services for these MSPs to protect SMEs And to do their jobs more efficiently. That one takes a little bit more time because of course we have to develop and build them into our platform, make them MSP ready And then that cohort for that service begins to add.

So those are the 3 areas with, I'd say, slightly different China Horizon regionally.

Speaker 4

Okay, great. That's really good detail. Appreciate it, John. Thank you guys very much.

Speaker 0

Your next question comes from Kingsley Crane of Berenberg Capital Management.

Speaker 6

Great. Thank you. It's great to see continued traction in the database management portion. Could you tell us a little bit more about the creation of this dedicated team and what other teams from within the business these team members may be coming from?

Speaker 3

So I was very specific in calling a core team. So the idea here is not so much to Hi, Bob from the functional team. We have organized functionally across the board because we want to create a lot more leverage, Let's say in product development and marketing and all the functions that we have. However, what we've done is that we have appointed A core team leader, Bob Potter and in essence built a cross functionally virtual team That is focused essentially day to day on driving this business. So in many ways, we preserve the integrity of our functional team, But also create the focus of our core team.

So that's the idea behind this particular initiative. And this is a very scalable model from IAC.

Speaker 6

Okay. I appreciate that. That's very helpful. And then one for John. That's very positive commentary on The growth drivers of Enable.

Just wanted to touch on the growth outlook that you provided at the most recent Analyst Day. So if we look at The results of 13% growth in Q1 with a month of positive NAND generation, the 14% growth implied by the guidance for Q2 And then the total 14% growth for the full year. I guess, what should we make of the guidance and what it implies for the back half of the year? And Is there anything else that we should be considering in terms of this growth outlook?

Speaker 5

Yes. So and just to

Speaker 1

remind the audience, so we guided Q2 $83,500,000 $84,000,000 That's at the 14%. And then for the year, we guided $340,000,000 to $344,000,000 What we're expecting to see, a pretty consistent pickup and acceleration throughout the year, I would say. As we go through, we see an add on and get some of the returns from the investment that we continue to go So that's how we're thinking about it. We'll continue to invest in some of the products. We expect to hopefully have A couple of new offerings that come on that add to the help for our MSPs that they can begin to add a little bit more in services.

We recently announced, a DNS filtering offering that will be integrated to our platform and those type of investments With the hope that we'll begin to get some return for both us and our MSPs.

Speaker 6

Okay. Thank you so much and congrats on a great quarter.

Speaker 1

Thanks, Keith Lee.

Speaker 0

Your next question comes from Eric Suppiger of JMP Securities.

Speaker 7

Yes. Thanks for taking the question. I think you mentioned during your Your comments about onetime costs, if there is some liability costs. What liabilities do you have for the What are the judgments and volumes that you're anticipating? And then secondly, can you comment about the performance of your observability Products.

I think those were kind of slow to get started a year or so ago.

Speaker 1

Hey, Eric, you were kind of fading out there at the end, but the first question As it relates to the liabilities, as of March 31, we don't have anything recorded from a liability standpoint as it relates to the cyber incident. We're fairly early on in the process of the investigation. And as of right now, there's nothing that we've accrued at this point. And I think your second question, could you repeat that? I think it was something around our observability products.

Speaker 7

Yes. The observability products We're slow to start, I think, if you go back a year or so ago. And I'm just wondering if those are Starting to pick up for you or how do you look at the competitive environment vis a vis like Datadog or

Speaker 1

So, yes, on the subscription revenue side for the core IT piece of our business, Yes, we are still evolving that product portfolio. We are still moving into that space. That is obviously going to be a priority for us in the back half of the year. That's one of the things that we're going to focus on. So in 2020, the back half of twenty twenty and then into 2021, a lot of our focus has been on the spin of the Enable business.

And the observability products, Eric, is something that we'll talk about in the second half of the year, probably something that Sudhakar and I will make a priority when we have our

Speaker 0

Your next question comes from Sanjit Singh.

Speaker 8

Hi, guys. This is Melissa Dunn on Sorry, Sanjit from Morgan Stanley. Thank you so much for taking the question. So hoping to Talk about the network monitoring. So how network monitoring is changing given the shift to cloud and how the Orion platform My need to modernize to address these use cases.

Speaker 3

Definitely. So there's a Couple of facts that I will highlight here. While there is definitely a shift to cloud in certain segments. A better way to think about the world is that the world is going to be hybrid for a very long period of time. That's step 1.

Step 2 is that even if you think about network monitoring on a premises basis, That is still a growth market, albeit not as fast growing as, let's say, a pure cloud only market. So our strategy is to leverage our platform to be able to support the needs of both kinds of deployment. And the way the Orion platform itself is evolving is through the integrated platform that I mentioned, which will not only support monitoring as in network system application and database monitoring, But also be the single platform that supports automation, monitoring, alerting and then remediation with our civil So that's the evolution to think about and that's what gives us a lot of Confidence that we become more relevant to support the growing needs of our customers.

Speaker 8

Okay, that's really helpful. And then just last one On my end, as we think about the cloud strategy going forward within the core IT management side of the business, Are there specific areas of investment that you guys are focused on?

Speaker 3

A couple of areas, I mentioned the database functionality and then we spoke about some of the Recognition we are getting in the APM space. Increasingly, the way to think about how we are focusing our is on that integrated platform with integrated functionality across those four dimensions that I discussed. So instead of looking at it product specific, We'll be looking at the broader needs of IT DevOps and SecOps Professionals.

Speaker 0

Your next question comes from Terry Tillman with

Speaker 5

Yes. Thanks for taking my questions. Maybe for Sudhakar or John, the idea of returning to demand generation activities, I'd be curious if we could Focus a little bit more on that because the reality is your sales cycles can be pretty quick, I believe, in both sides of the business, core IT management and enable. So what are some of the early things you're seeing from the return to demand generation activity in terms of the rebuilding of pipeline, etcetera? And how quickly could that get back to normal cadence on demand and related volumes.

And then I had a follow-up.

Speaker 3

Sure. First, I'll reiterate what Bart highlighted in his prepared comments, which is that our performance throughout the quarter on both Size of the business continued to improve through the quarter. So March was better than February, which was better than January. And that applies to the demand gen engine as well. When the cyber incident hit us, it was Pretty much all hands on deck from our side and our partners to essentially help our customers I understand the impact.

And as you know, the vast majority of our customers were not impacted, but even so we tried to touch as many customers as we could To make sure that they were safe and secure. So, Paula, traditional demands and activities were not the main areas of focus. But then as we Started stabilizing things in Q1. We turned our attention to demand in. And as you know, we have a fairly high velocity demand in And the way I would describe it is that demand gen is normalizing.

Although we continue to focus on it From both an investment and activity standpoint to continue to help it grow because we have growth aspirations on both sides of the business.

Speaker 5

Got it. And the second question, and Bart, that was helpful providing that kind of end quarter renewal rate of 87%. That's great to see. What I'd be curious, and I don't know who this question is for, the federal sector is a big part of your business. And How has the resiliency been in that sector specifically versus the other industries?

And what are you thinking going into the back half of the year where we do have the seasonal strength typically. Thank you.

Speaker 1

So, yes, so the 87% that I provided, like I said, we expect that Actually improved a little bit more as we move through Q2. That includes our federal customers as well. So that's both our commercial I will say that our Fed business was slightly lower than the number that we're giving there for Q1. But we also talked about the fact that we had our Customer renewed in Q1. And we've talked about that deal in the past and that's a Fed customer as well.

So we are seeing engagement with our Fed customers. We are having to work probably a little bit harder with that base, but we are renewing that customer base

Speaker 3

as well. And I have been talking to a number of customers, including a disproportionate amount of my time on the Given the size and the scope that we have with them and many of the customers have turned things back on, I have renewed to Bob's point and also continue to expand. We don't really break down specific renewal rates by segment, be it Public Sector OR Commercial. So continue to think about us in the blended context and we'll add commentary as we go.

Speaker 1

Thank you.

Speaker 0

There are no further questions. I'll turn it back to you for closing remarks.

Speaker 1

I think we are done. Thank you folks.