SolarWinds - Q2 2021

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the SolarWinds Second Quarter 2021 Earnings Call. All lines are currently in a listen only mode. After the speakers' presentation, there will be a question and answer session. It is now my pleasure to hand the conference over to Ashley Hook.

Speaker 1

Thank you, Nicole. Good morning, everyone, and welcome to the SolarWinds Second Quarter 2021 Earnings Call. With me today are Sudhakar Ramakrishna, our President and CEO and Bart Kalsu, our EVP and Chief Financial Officer. 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 during today's call. Please remember that 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 opportunities, the impact of the global economic environment on our business and the related the recently completed spin off of the Enable 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 the recently completed spin off of the Enable business.

Additional information concerning these statements The risks and uncertainties associated with them is highlighted in today's earnings release and in our filings with the SEC. Copies are available from the SEC or on our Investor Relations website. In addition, we note that our financial results for the 2nd quarter In today's remarks, when we reference our ongoing SolarWinds business, this will refer to our core IT management business excluding Enable. 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 the non GAAP financial measure.

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 the summary slide deck on our Investor Relations website. Going forward, we will begin to present certain financial measures on a GAAP basis only. With that, I'll now turn the call over to Doctor.

Speaker 2

Thank you, Ashley. Good morning, everyone, and thank you for joining us today. I hope you're doing well and staying safe. I want to start by first thanking our employees, customers, partners And our shareholders for their ongoing commitment to SolarWinds. Our employees, we call ourselves SolarWinds continue to demonstrate excellent commitment to our customers.

As I outlined in the Q4 2020 earnings call, Customer retention is our number one priority in 2021 and we made great progress towards this goal in Q2. I attribute the progress to the dedication of our employees, the relevance of our solutions to address customer needs and the commitment of our partners And customers with SolarWinds. We substantially completed our investigation into the cyber incident And published our findings in May and continue to apply the learnings via our Secure by Design initiatives. I have also had the opportunity To share our findings in public forums such as the RSA, the DICEK Global and UK Cybersecurity Conferences as well as with industry peers and government authorities around the world. It is an unfortunate fact No company, regardless of its size, competency and resources, seems immune to cyber attacks as evidenced by the recent high profile breaches.

In this environment, our pledge of transparency And industry collaboration remains strong and has been well received by customers, partners and the broader industry as we accelerate our journey to deliver simple, powerful and secure solutions. As a reminder, Our Secure by Design initiative focuses on 3 core areas. 1st is to enhance the security of our internal environment and 2 is to enhance the security of our software systems and environments And 3rd is innovating to enhance software supply chain build processes. We've devised a unique software build process that's performed across 3 discrete environments with different characteristics and permissions. This build process Results in a changing threat surface and a compressing threat window, thereby making it more difficult for threat actors to break in and therefore enhancing the integrity of our software supply chain.

This approach has resonated Well with our customers, many of whom are also developers of software and we are winning significant deals with customers as a direct result of this aspect of our Secure by Design initiative. Also, as part of our ongoing efforts To make customer environments more safe and secure, we plan to publish white papers and other materials to help the industry at launch. I will now touch on a few financial and operational highlights in Q2 for our consolidated business. For the Q2, we delivered revenue well above the high end of the range of our outlook with total consolidated Non GAAP revenue ending the quarter at $262,000,000 representing year over year growth of 6%. Our consolidated results include Enable for the 2nd quarter, which we successfully spun out last month.

2nd quarter consolidated an adjusted EBITDA margin of 42%, exceeding the high end of our outlook for the 2nd quarter. Our Q2 ongoing SolarWinds maintenance annual rate of 86% is above the lowtomid80s annual rates We noted we expected in 2021. 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%. We secured the largest On premises term subscription deal in the company's history from a large healthcare provider in the United States. This further validates our transition to a business with a higher subscription mix and the confidence that customers place in our portfolio roadmap.

Our consolidated subscription revenues grew 17% year over year with our ongoing SolarWinds subscription revenue Growing 16% year over year and this area of our business will continue to be a key focus of mine on an ongoing basis. We are winning large public sector deals throughout the world. In many of these customer engagements, Our Secure by Design initiative features prominently. We are seeing that the comprehensiveness of our initiative As described earlier in my comments and its applicability to a broad range of customer environments is a key differentiator. During the Q2 of 2021, we launched SolarWinds database insights for SQL Server, Expanding our comprehensive database performance management portfolio, uniting the features and functionality of the award winning SolarWinds Database Performance Analyzer and SolarWinds SQL Sentry database insights for SQL Server provides The in-depth performance and environmental data teams need to optimize the performance of Microsoft SQL Server and other leading database platforms running on premises in the cloud or in hybrid environments.

Our products and services We received more than 35 industry and customer awards in the first half of twenty twenty one. Notably, TrustRadius named 9 SolarWinds IP operation management products as 20 21 Top rated award winners across 13 categories and the company's commitment to customer support and success Was honored through 5 CV Awards. We continue to attract excellent talent across all functions of our organization. People see the opportunity we have with our mission and strategy to address what we believe will be a $100,000,000,000 market opportunity. Last but not the least, we reached another significant milestone by completing the spin off of our managed services business, now known as Enable on July 19, 2021.

By operating as 2 independent publicly traded companies, We believe that SolarWinds and Enable will be better positioned to align with each other's market needs and customer requirements, Enhancing the successful operations of both companies in the future. With that, I will turn it over to Bart to provide more details on our financial performance and outlook.

Speaker 3

Thanks, Sudhakar, and thanks again to everyone joining us on today's call. I will discuss our 2nd quarter results on a consolidated basis consistent with what we have discussed in the past. I will also provide some supplemental information related to the ongoing SolarWinds business. As most of you know, our spin off of the Enable business occurred last month on July 19. Therefore Enable's results are included in our 2nd quarter financial results and our 2nd quarter guidance assumed Enable results for the full quarter.

We are in the process of preparing carve out financial statements. In the future periods, our public filings will present Enable as discontinued operations. Our 2nd quarter financial results reflect solid execution while demonstrating the resiliency of our model. That execution led to another quarter of better than expected results and finished well above the high end of the range of our outlook For the Q2 with total non GAAP revenue ending the quarter at $262,000,000 representing year over year growth of 6%. Total Enable revenue for the Q2 was $85,000,000 representing year over year growth of 16%.

The Enable management team will talk about their results in a separate earnings call on August 12. Excluding Enable, Total ongoing SolarWinds revenue was $177,000,000 above the high end of our 2nd quarter revenue outlook $170,500,000 to $174,000,000 Total license and maintenance revenue was $149,500,000 in the 2nd quarter, which is flat with prior year. Maintenance revenue was $123,000,000 in the 2nd quarter, up 5% versus the prior year. We typically disclose the maintenance renewal rate for our perpetual license products on a trailing 12 months basis, which was 90% through the end of the second quarter. This includes more than 2 quarters of renewals since the cyber.

Also consistent with the Q1, we want to provide the end quarter renewal rate for the most recent quarter. Our 2nd quarter end quarter renewal rate is Currently at approximately 86%, which again is above our expectations at the start of the year. Our primary focus for the first half of the year was to ensure that our customers recognize our efforts related to our secure by design commitment And trust us to help them transform faster in an increasingly hybrid IT world. And we believe our renewal rates So far in 2021 demonstrate that trust. For the 2nd quarter license revenue was $26,700,000 which represents a decline of approximately 21% as compared to the Q2 of 2020.

On premises subscription sales resulted in an approximately 9 percentage point headwind to our license revenue for the quarter. The remainder of the decline in license revenue reflects the combination of the impact of the security Including our decision to pause demand generation and customer acquisition activities from December through the Q1, as well as the continuing impact of the COVID-nineteen pandemic. That said, we improved our new license sales performance sequentially And the year over year decline in the 2nd quarter is an improvement from the year over year decline in the first. We saw acceleration in new license sales in our commercial business in the 2nd quarter. We are working to continue that trend as we move through the rest of the year.

Total ARR reached Approximately $992,000,000 as of June 30, reflecting year over year growth of 14%. Our ongoing SolarWinds ARR represented $640,000,000 out of that total at the end of the second quarter. Ongoing SolarWinds ARR grew 12% year over year. Due to the incremental revenue from CenturyOne, the CenturyOne acquisition in the Q4 of last year and our continued focus on retaining our maintenance base. Moving to our subscription revenue.

2nd quarter consolidated non GAAP Subscription revenue was $112,500,000 up 17% year over year, of which $82,800,000 was from the Enable business. Our ongoing SolarWinds subscription revenue was $30,000,000 in the 2nd quarter, which reflects 16% year over year growth. This is an area of our business. We finished the Q2 of 2021 with 1107 customers that have spent more than $100,000 with us in the last 12 months, which is a 16% improvement over the previous year. We are continuing our efforts to build larger relationships with our enterprise customers in our ongoing SolarWinds business.

We also had a solid second quarter of non GAAP profitability. 2nd quarter consolidated adjusted EBITDA was $111,000,000 representing an adjusted EBITDA margin of 42%, Exceeding the high end of the outlook for the Q2 and unlevered free cash flow improved in the Q2 to total $18,000,000 Excluded from EBITDA and unlevered free cash flow, our one time costs of approximately $24,000,000 including $13,000,000 of spin off related costs and $11,000,000 of cyber related remediation, containment, investigation and professional fees, Net of insurance proceeds, I do want to clarify that the cyber related costs not included in adjusted EBITDA are one time and not good. They are separate and distinct from the Secure by Design initiatives, which are aimed at enhancing our IT security supply chain partners. Costs related to our Secure by Design initiatives are and will remain part of our recurring cost structure on a go forward basis. We expect one time cyber related costs to fluctuate in the 3 quarters, but to be less in future periods as the amount incurred in the first half of the year.

These one time cyber costs are however difficult to predict. They not only include the significant cost of the forensic investigation efforts, Which we substantially completed in May, but also costs associated with our ongoing litigation, government investigations, Any potential judgments or fines and related professional fees. We expect our insurance coverage to offset a portion of these expenses and will be presented net of any insurance proceeds received. Our one time spend related costs will continue through the 3rd quarter As we finished the legal and accounting compliance work associated with the spin as well as the ongoing work associated with separating our internal systems in connection. Net leverage at June 30 was 3.2 times our trailing 12 months adjusted EBITDA.

SolarWinds will retain the full amount of the $1,900,000,000 in term debt. On July 30, we completed a 2 for 1 reverse stock split and declared a dividend of $1.50 per share on a post split basis, which will be paid on August 24, Primarily from the approximately $236,000,000 of cash that was distributed by Enable in connection with the spin off. In addition, Enable will repay $325,000,000 of intercompany debt. SolarWinds will retain that cash on our balance sheet for the foreseeable future. And as a result of this repayment, we expect our cash balance to be approximately $680,000,000 at the end of the 3rd quarter, bringing our net debt to approximately $1,200,000,000 on a post spin basis.

I will now walk you through our ongoing SolarWinds outlook Before turning it back over to Sudhakar for some final thoughts. Consistent with our guidance for the past year, we will only provide Q3 of 'eighteen 'twenty one outlook for total revenue, adjusted EBITDA and earnings per share. We are also only providing guidance as it relates to our ongoing SolarWinds business, which is what remains after the spin off of Enable. For the Q3 of 2021, we expect ongoing SolarWinds total non GAAP revenue to be in the range of $176,000,000 to $180,000,000 representing a year over year decline of 3% to 5%. Adjusted EBITDA for the ongoing SolarWinds business for the 3rd quarter is expected to be approximately $70,500,000 to $72,000,000 which implies an approximately 40% adjusted EBITDA margin.

As a reminder, our EBITDA margin forecast includes the incremental spending associated with our Secure by Design Our ongoing investments in our international sales teams and database management products and the continued evolution of our subscription model. Non GAAP fully diluted earnings per share is projected to be approximately $0.27 per share, assuming an estimated 160 2,000,000 fully diluted shares outstanding, which reflects the reverse stock split completed on July 30. Finally, our outlook for the 3rd quarter assumes a non GAAP tax rate of 22% and we expect to pay approximately $7,500,000 in cash taxes during the Q3 of 2021. The 3rd quarter outlook incorporates a few factors. First, As we discussed during our Q3 2020 earnings call, our federal business had one of the stronger quarters in our history, creating a tough compare.

For that reason, while we continue to grow sequentially in new license sales to our federal customers in 2021, we are not expecting results like the prior year. The second is that maintenance revenue reflects the impact of lower new license sales since the start of the pandemic in early 2020, As well as our expectation that the renewal rates in 2021 will be in the mid-80s. And finally, our 3rd quarter outlook reflects Continued transition of a portion of our new sales to on premises subscriptions. While we are not providing full year outlook, I will say that we expect new license And subscription sales in our commercial business to continue to improve in the 3rd quarter and as we move into the 4th quarter, which is usually our strongest quarter of the year for new bookings. Based on what we've seen so far in the first half, we expect that the maintenance renewal rates will be in the mid-80s for the rest of 2021 We are targeting to return to historical performance in 2022.

We intend to continue to expand the subscription offerings of our on premises products In 2021 2022 and make new subscription sales a much higher priority with our sales teams. As we think about our EBITDA margins for the rest of the year and into 2022, the costs associated with our Secure by Design initiatives, Investments in transitioning our product portfolio to a greater subscription mix and our continued investments in our sales and marketing initiatives are factored into the margins in the short term. We continue to remain committed to accelerating margins again in 2022 and beyond. With that, I will turn the call back over to Sudhakar for his closing remarks.

Speaker 2

Thank you, Bat. Our team's confidence, commitment and attitude continues to be evident As we delivered a strong Q2 performance and results exceeding our outlook in both revenue and EBITDA, We are executing our mission to help customers accelerate their business transformation via simple, powerful and secure solutions for Hybrid IT and Wireless. We believe our consolidated platform, breadth and depth of capabilities and our commitment to customer success We'll enhance our ability to be relevant to customers and enhance the lifetime value potential of our customer base. For the remainder of 2021, our focus will continue to be on executing on the initiatives that I outlined During our Q4 2020 earnings call, focusing on customer retention and demonstrating ongoing progress in subscription, license and maintenance growth across all geographies and sectors. Additionally, we continue to hone our long term strategic portfolio and model.

We look forward to hosting you all for an Analyst Day in Q4 of this year. Please stay tuned for additional details. I'll conclude again by thanking our employees, partners and customers for their commitment to SolarWinds. We hope to continue to demonstrate progress across all dimensions of strategy and operations as we execute our second half plans and into 2022. Bart and I now will be happy to address your questions.

Speaker 0

We'll pause for just a moment. The first question will come from the line of Matt Hedberg with RBC Capital Markets.

Speaker 4

Hey, it's Dan Bergstrom for Matt Hedberg. Thanks for taking our questions. Could you talk a little bit about Customer retention, obviously, a key focus here. The renewal rate continues to track ahead of that kind of the low to mid-eighty percent figure you provided in February. What's behind that?

And then what are you focused on doing? Or is it more just more time needed to move back to that historical 90% range?

Speaker 2

Matt, this is Sadaka. I'll take that question. The first thing I would highlight is the Commitment of our employees to customer success. We have been engaged with customers constantly and we continue to be engaged with customers constantly. The second is the relevance of our solutions to customers.

As they Engage with us, understand what happened as well as understand the initiatives that we have taken That I call Secure by Design. They seem to appreciate not only the value that our products bring to them, But also the commitment that we have to the safety and security of customer environments at large. So those are 2 contributing factors, I would say, the Committed to our employees, the relevance of Power Solutions. In terms of what it would take to get back to historical levels, This is basically going to be a journey map, which is in the first half of this year, quite literally and also into Q3, Customer engagement and customer retention has been our priority. And as customers come back up online, There will be sometimes delays in terms of their evaluation processes, delays in their renewal processes and so on.

And so we factored all of those when we came out from the low to mid-eighty annual rates, which, as you noted, are obviously trending better than what we projected. And so our belief is that we'll continue on that path going forward into 2022 and beyond.

Speaker 4

Great. Thanks. Very helpful. And then could you talk to linearity trends in the quarter? Anything different from what you'd expect as far as building on the Q1?

And then July is complete at this point. Anything to note as far as Q3 trends? Thank you.

Speaker 2

So what I'd highlight is to reinforce Bart's comments that quarter after quarter, month after month, we are seeing progress across Various parts of our business as well as various geographies. I'll also highlight that in Q1, for the most part, we did not pursue demand generation activities because our first priority and the main priority was to Help customers stabilize their environments. It was only later into Q1 that we reinitiated, so to speak, our demand gen activities, and those are gaining more momentum as we go through the year. And so that will continue to have a meaningful impact into Q3 and Q4.

Speaker 1

We'll take the next question.

Speaker 0

The next question comes from the line of Sterling Auty with JPMorgan.

Speaker 5

Yes, thanks. Hi, guys. I apologize if I ask you to repeat some things. We're juggling multiple calls. But When you talk about the renewal rates, you kind of talked about continuing in the mid-80s.

But what I'm curious about is maybe some of the Commentary that you heard back from customers, it doesn't sound like there was a material uptick in the quarter, but How would you characterize what you did see relative to what you expected coming into the quarter?

Speaker 3

Yes, Sterling. I mean, as we said, our Q2 in quarter renewal rate is currently at 86%. This is Consistent with what we did in Q1, maybe slightly lower, but not necessarily what we didn't what we it's not out of line with what we expected. When we send out renewal quotes, we send those out 90 days ahead of time. So Q1 was in flight from a renewal standpoint at the time of the cyber incident.

So that's one of the reasons why we expected Q1 to be better, maybe than the rest of the year is because we knew that, a certain amount of our base had already renewed. So as we move through the rest of the year, it's why we continue to say that the renewal rates would be In the mid-80s, low to mid-80s, as we move through 2021, even though the Q1 was a little higher, we were very, pleased with the fact that We are now at 86% on end quarter renewals for the 2nd quarter. We also know that the rest of the year is going to be will be Still be a challenge for us, but it is our number one focus and it's our number one priority is maintaining our customer base.

Speaker 2

And Sterling, just to add to Bob's comments, He noted in his prepared remarks that our trailing 12 months renewal rates are at 90%. So one thing I would highlight this environment and the reason why we gave a full year outlook in terms of the approach to renewal rates is that every Quarter, different set of customers come up for renewal. And as we've engaged with them to help their environments become more and more stable, Bill, inevitably some cases where customers will take a little bit extra time to renew compared to, call it, historical trends. And so we are trying to factor all of those and that's the reason why we sometimes go back and update the renewal rates Be it for Q1 or previous quarters as well, largely to the upside.

Speaker 5

Understood. And then on the margin front, you kind of gave the three areas of investment that you're making, but I want to make sure I understand what ones of those do you expect to be kind of temporary investments And maybe give us an order of magnitude where we should see increasing leverage off of whatever spend we're going to see next quarter. And what ones are going to be kind of continuing to invest maybe at a rate that's similar to growth, so we don't get as much leverage?

Speaker 3

Yes. So Sterling, when we talked about the Secure by Design initiatives, on the previous earnings call, we talked about those The cost associated with those being in the $20,000,000 to $24,000,000 range, we think it's going to come in maybe at the lower end of that number. But those costs that incremental cost is going to be in our ongoing cost structure. Those are things like increasing Some of our headcount in our R and D organization around our supply chain process, some of the penetration testing and some of the other things that we're going to do from a system standpoint to enhance our IT structure, things like that are going to be just part of our ongoing structure. But And hopefully, the cost associated those costs are not going to ramp as our business goes up.

Those are just going to be costs that will be built in. The cost associated with some of the things that we also talked about and that is enhancing our international sales teams, Some of where we've seen some positive results in 2021 has been outside the U. S. And we're going to continue to invest in our international go to market motion. We also believe that the database market is a market of opportunity for us, Not just this year, but as we go into 2022.

And so we're going to continue to invest in that market as well. And we hope that those investments will scale as revenue grows over time.

Speaker 5

Understood. Thank you.

Speaker 3

Thanks, Chris.

Speaker 0

The next question will come from the line of Kingsley Crane with Berenberg.

Speaker 6

Hi, thanks for taking my question. So on July 9, you released a vulnerability So could you please tell us about how many customers were impacted by this and how the customer conversations are growing since that point?

Speaker 2

So I'll take that. Yes, we did issue a Hatch, for the vulnerability, the way I would characterize that is that it has obviously nothing to do with the sunburst Brief that we reported back in December. This is a typical unfortunately, a typical 0 day vulnerability that That's us and other software vendors. And this would be an example I would cite of the security research community And the vendor community that includes us working closely together to understand possible vulnerabilities and getting ahead of the curve By patching and releasing that to customers. So the way I would describe the customer support aspect and Feedback is like with any issue, whether it's a quality issue or a security issue, we proactively reached out to customers, Help them with any download needs that they had, any upgrade needs that they had.

But in terms of customer support volume, I would not say that it was anything unusual for us to have.

Speaker 6

Okay, perfect. That's very helpful. That's it for me.

Speaker 0

The next question will come from the line of Sanjit Singh with Morgan Stanley.

Speaker 7

Good morning. Thank you for taking the questions and congrats on the Enable spin. I had some questions on guidance. So If we look at this quarter's results, total revenue was up 2%. Next quarter, we're looking for a decline of, I think, 3% to 5%.

So if you can help me sort of bridge that given the consistency on the maintenance renewal side that you're expecting. And then also From a maintenance ARR side on the core IT business that was up quite healthy, I think 11% in Q2. So Any sort of context you can provide on why the business would go ex growth in Q3?

Speaker 2

Definitely, Sanjay, I'll provide some color and I'm Pat will jump in as needed as well. The first component I would highlight is that There is an ongoing focus within our business to evolve to subscription. And so we are going to have some headwinds associated With subscription, so that's one factor that I'd highlight. 2, as we accounted and modeled for our Q3 bookings, We have to keep in mind the federal sector where we continue to make progress even on a sequential basis, But last year's, February quarter, Q3 2020, was one of the largest in our company's history, and so we had a very tough compare year over year associated with that. And then the third factor that we accounted for, although our renewal and maintenance Rates continue to improve.

It's factoring in the fact that in 2020 due to the pandemic, New product license sales were tepid, and so we are modeling our renewal rates and renewal dollars associated With that particular fact, so the combination of these three things is what causes us to predict the way we are. And we'll obviously, as Bart highlighted, continue to focus on our commercial business, We need to demonstrate progress month after month, quarter after quarter.

Speaker 3

And Sam, I just want to reiterate, maintenance revenue for us is More of a trailing indicator of our business. So, we're somewhat you're going to see some slowdown in our maintenance revenue, Primarily because of the bookings and what's happened to our license bookings over the last 4 to 6 quarters, You'll start to see that in our maintenance revenue. So you won't see a reacceleration in our maintenance revenue until we start to factor in more of these quarters We're growing license revenue year over year.

Speaker 7

Understood. And Sudhakar, you make a good point on the subscription transition. If you can talk about sort of the unit economics of the subscription transition, it sounds like we're about $120,000,000 roughish in subscription ARR, Growing at a pretty healthy clip, even if you account for the acquisition. In terms of sort of the year one impacts for a customer, What does that revenue headwind look like? And what is the sort of revenue breakeven timeframe?

Is that sort of a 2 year or 3 year? Can you just sort of Review the basics of the subscription transition for us, that would be helpful.

Speaker 2

So, Hossand, first of all, we are making Significant progress in the subscription part of our business as we noted. In terms of unit economics and call it term, The way we would be looking at our economics is typical of the software industry. So think of it as a 2 to 3 year type of a return model.

Speaker 7

Understood.

Speaker 3

Hey, Jade, if you remember, when we priced our subscription offerings, our on premises subscription offerings, we looked at the 3 year Value of a license and maintenance model, we divided that by 2.75 and that's how we derive what our subscription pricing was going to be. Yes, it's generally the model that we're following. And then so a subscription booking is going to be obviously less than what a new license Maintenance booking would be in a year 1. There is a little bit of an upfront component to the subscription revenue And we'll talk about some of these things in more detail at our Analyst Day that Sudhakar talked about earlier. We'll also be able to talk a little bit more about how that what we think that impact should be in 2022.

Speaker 7

I understand. Thank you so much. Thanks.

Speaker 0

The next question will come from the line of Kirk Materne with Evercore ISI.

Speaker 8

Hi, thanks very much. Sudhakar, can you just talk a little bit about how conversations are going in terms of customers now maybe thinking about on prem versus Cloud, Mining and Management. I was just kind of curious if you've seen any real change in that trend. Obviously, new licenses were up Sequentially, so that's good. So it doesn't seem like it's changing too fast, but we're just kind of curious about how those conversations are trying to be fixed.

Thanks.

Speaker 2

Definitely. So customers want choice in this particular category. So the way I would describe this is that hybrid is probably the way to think about the world as we move forward. It's not a matter of premises only or cloud only. And so what customers are really looking for is a platform that can support The evolution of PEMISYS to the cloud, as you will see in our upcoming, Call it packaging, pricing of models, we are going to give greater comfort to customers as they traverse this journey of premises to Cloud into a hybrid world.

And so more and more of our conversations are around that aspect. Without going into too much detail, There's also nuances between even in the cloud context, whether things are cloud native versus cloud managed, And we are working on solutions around both of those. In fact, what I would say is that the combination of our Secure by Design initiatives as well as the articulation of our portfolio roadmap to customers It's giving them confidence that we can be a vendor that will not only support their needs in the current context, but also as they evolve more and more towards cloud and containers and hybrid application ecosystems.

Speaker 8

Very helpful. And then maybe just one for part. When we think about the Q3, you mentioned obviously you guys have a tough federal comp coming up. I was just wondering how you think about sort of the federal Impact maybe on maintenance rates or if you feel better or worse about that particular segment of your population or as you can't talk about Just specifically, but after we get through the Q3, should we feel like you guys have gotten over the should you have, I guess, a better view of ongoing maintenance rates Once we get through this sort of big seasonal quarter feel?

Speaker 3

Yes. I mean, the Fed business is a big piece of our business, Perfect. It's not what I would consider significant. It's not massive. It will have an impact on us in the Q3.

It's one of the reasons why even though our renewal rates have more been in the high 80s, We still want to say be somewhat conservative guide renewal rates to be in the mid-80s for the rest of 2021 is because That number is a blend of both our commercial and our federal business. And so we know there is going to be some impact in the Q3 as it relates to our fed customers. So that's why we've guided, like I said, to the mid-80s. We are going to push harder and we hope to do better than that. I think we've ended Q1 at like 89% on the renewal rate from a renewal rate standpoint.

And we think the 80% or 6% for the 2nd quarter had some room to improve as well. So We're going to always push for more, but that's because of the Fed business in the Q3. That's why we are guiding to that mid-80s for the rest of the year. We do think that this is a 1 year phenomenon for us. We do expect to get back to what our historical levels have been when we get into 2022.

And we think the move to subscription for us will be positive as well because it will give us the ability to land and expand customers In a much easier fashion.

Speaker 2

Thank you.

Speaker 0

The next question will come from the line of Rob Oliver with Baird.

Speaker 9

Great. Thank you. Good morning, guys. Sankar, I was wondering if you could just Cheryl, a little bit about your philosophy around the product evolution and the platform. You had mentioned that you did plan to call the portfolio a little bit.

I know you guys I've also been opportunistic and database seems to be an area where you could continue to be so. But just wondering if you could talk a little bit about Your philosophy on how you think about culling that portfolio? Sure.

Speaker 2

I would probably not use the word Karl in this context as much as how do we consolidate our capabilities Such that our value propositions to customers become more crystal clear and compelling. So in that vein, in the near term, When I say near term, let's call it 8 couple of quarters, our focus will be on better integrations and better packaging and pricing of our portfolio. So on one hand, that will improve our ASPs possibly, But on the other hand, it will deliver more compelling value to customers. So that's our first step. But continuing on that thread, We are working fast and furious, I would say, on a hybrid platform that will be a singular platform upon which All of our capabilities will be delivered.

So in this regard, we can support a land expand penetrate motion Much more successfully with customers as opposed to having them deal with multiple point products. So there's efficiencies for the customers at one level, But there's also internal R and D efficiency because we'll all be working on one platform, one set of user experiences, consistent with our commitment to deliver Not only powerful in simple solutions, but also secure solutions.

Speaker 9

Got it. That's helpful. Thanks. And then just to follow-up on that one, just On the CenturyOne business in particular, I just was wondering if you could talk about the database opportunity and database trends. And then That I think at one point, I don't know if this was just public speculation about whether that would stay with you guys or go with Enable.

Is Enable to remain a large customer for Century 1. And if you could just maybe help us understand that, I'm sure maybe we'll get more color at the Analyst Day, but any thoughts would be appreciated. Appreciate it. Thank you.

Speaker 2

Sure. First of all, SensiOne is very much part of ongoing SolarWinds, step 1. Step 2 is that, while SensiOne is very significant to us from a sequel Database environment standpoint, SolarWinds also had incredibly powerful database solutions prior to CenturyOne as well. And so one of the key strategic things that we've done is integrating our database portfolio such that We have the broadest portfolio to support the most number of platforms out there, be it SQL Server, Oracle, Postgres and others, but also be able to deliver them in such a fashion that customers can deploy them either on premises All in the cloud. So that particular set of integrations is already complete.

And the most recent thing that I announced In my prepared remarks was the extension of those capabilities called database insights, which is an

Speaker 0

The next question will come from the line of Terry Tillman with Truist.

Speaker 10

Yes, good morning. Thanks for taking my questions. I guess, Sudhakar, the first question is just related to this largest subscription deal to date, I guess, you commented on with the Could you shed a little bit more light in terms of what product or products they bought? And how is the pipeline for large And then I had a follow-up.

Speaker 2

On the first part of your question, that was A great example of a customer who is able to leverage a broad swath of our portfolio. So it wasn't like one product, let's call it network performance monitoring as an example, but it was actually a combination of our product elements to support So this also relates back to the point that I was making about in the next couple of quarters, you will see us packaging our solutions And pricing them in ways that will be more compelling from a customer standpoint. And so what you will see is that more of our packaging To customers where they are not only consuming a point product, but are able to solve multiple solutions and solutions could be Application monitoring integrated with database monitoring, as an example, are a combination of network management and database management in the same environment. So increasingly, you'll see that and then that will not necessarily culminate, but it will actually evolve into that hybrid IT platform that I mentioned. With regards to your question on the pipeline, the way I'd address it is that subscription selling and proposition It's a heightened area of focus for our sales teams, including the incentive structures To support and promote that.

Speaker 10

Okay. And Bart, maybe just a follow-up. Thanks for the commentary on the $30,000,000 ongoing I think it was up 16% year over year. As we look into 3Q and 4Q, I mean anything at all you can share on how this ramps from $30,000,000 Thank you.

Speaker 3

Yes, I mean, it is being impacted by the CenturyOne acquisition that we closed last year in Q4. So the 30,000,000 It's going to have some increase in Q3 just because of the CenturyOne deal that closed in November of last year. So you will see a little bit of Slow down as far as the growth goes because of the acquisition last year. And really the growth will be driven by But how effective our sales force is in transitioning some of these opportunities into subscription deals. We're not going to be It's going to be a customer led decision.

We are going to try to get our sales force incented to push the subscription deals, but The hardship has yet to occur.

Speaker 0

We'll take the next question. Next, we have a follow-up from Sterling Audio with JPMorgan.

Speaker 5

Yes. Thanks for squeezing me back in. I'm getting a number of questions From investors around the Fed business, I know you haven't broken it out in specific, but I'm going to push a little bit. So when you back out the MSP business, How would you characterize the size of the Fed business that's left? That's number 1.

Number 2, can you quantify How big is the surge that you saw last year? And 3, I think people expect a pretty healthy spending environment Out of the government this year as well, why do you think that perhaps wouldn't repeat itself?

Speaker 3

So our Fed business, Sterling, we've talked about it in the past in the Q3. I would say It's approximately 10% of our total revenue base. When we're looking at what annually, what is our Available to renew, our Fed business is somewhere in that 10% range. As you know, our federal customers are not One individual customer, it's a bunch of individual users within the federal government. We talked about our one big customer In the Q1, that is our single largest customer by far.

The rest of our business is made up of Smaller individual agencies within the federal government like I said. So if you're thinking about it from a total revenue standpoint, it's approximately 10% When you add up all those different customers, as far as the Q3 goes, for us, the biggest impact to our business from the cyber incident Was the noise within the federal government. So therefore, conversations with the federal government and any of the agencies within the federal government Has been a little slower for us, and has been where we've gotten the most. I would say, if you want to say pushback, It's been within the federal government.

Speaker 5

Understood. Thank you.

Speaker 1

We'll take one more question.

Speaker 0

That question will come from the line of Eric Deepakar with JMP Securities.

Speaker 11

Yes. Thanks for taking the question. Just trying to understand Where you are in terms of your focus on lead generation versus customer retention, I understand you restarted your lead generation efforts At the end of Q1, are you doing all of your traditional campaigns for driving Leads and generating incremental business or where are you in terms of that ramp? And then can you talk a little bit about What profile customer is most at risk for churn? You've just noted that federal has probably the highest churn of any Sector, what types of customers do you see that are most reluctant to renew?

Speaker 2

Yes. So let me address that. First, I want to provide a point of clarification on the Fed churn comment that you made. I don't think we are highlighting that they have the highest propensity for churn as much as they tend to be the most conservative customers as it relates Bringing things back online. So helping them, working with them and stabilizing their environment is a priority of ours.

So just a point of clarification. To your point on demand generation, for the most part in quarter 1, We did not have normal demand generation activities. That was only later into Q1 that we started ramping those back up, And I would categorize them as being steady state today. With regards to what customers are having the Hi, it's Pritan. If you could churn, the way I would describe it is that every one of our customers is super important to us, large or small, regardless of sector.

But in terms of are we seeing a specific pattern of churn in a specific customer segment? The short answer is no, quite simply because we do not have a lot of churn based on what we are seeing with customers. And even where we do, there isn't enough of a sample set to give you a trend of various payment.

Speaker 11

Okay, very helpful. Thank you.

Speaker 1

I think that's