SolarWinds - Q4 2020
February 25, 2021
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the SolarWinds 4th Quarter 2020 Earnings Call.
Speaker 1
Session.
Speaker 0
I would now like to hand the call over to your host, Howard Ma, Senior Director of Investor Relations. Please go ahead.
Speaker 2
Thank you, operator. Good morning, everyone, and welcome to SolarWinds' 4th quarter 2020 earnings call. With me today are Sudhakar Ramakrishna, our President and CEO and Barkhalsu, our EVP and Chief Financial Officer. Following prepared remarks, 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 attack on our business, our market 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 and the potential spin off of our MSA business. Additional information concerning these statements and 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.
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 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'll now turn the call over to Sudhakar.
Speaker 3
Thank you, Howard. Good morning and thank you for joining us today. I hope you're doing well and staying safe. As you know, I joined the company earlier this year on January 4, and this is my first earnings call with the company. I want to start by first thanking our employees, customers, partners and our shareholders For their ongoing commitment to and for their support of SolarWinds.
I have long been a student of SolarWinds' high velocity go to market model. Our Our broad portfolio of solutions, low customer concentration, strong revenue recurring base, Strong balance sheet and the opportunity to apply my background to address an expanding market opportunity to support the needs of IT ops, DevOps and SecOps professionals made it easy for me to say yes when I got the opportunity to leave the company as President and The vast majority of the customers that I have spoken to understand that the cyber incident that affected us and others could have happened to any vendor and especially a broadly deployed vendor like SolarWinds. Equally, They're eager to see us address the issue and share our learnings, which we are doing. The other opportunity that keeps coming up in these discussions focusing on our products, making us a more strategic partner. The majority of our customers that downloaded a version of the effective code have upgraded to our latest version and continue to renew their contracts with us.
While the first priority continues to be ensure the safety and security of our customers, Our conversations with customers and partners have also given us the opportunity to discuss the strength of our entire portfolio and of our future plans. I have also spent a significant amount of time on the cyber attack I'll elaborate on our investigation, learnings and future plans, but first I'll touch on a few financial and operational highlights in Q4 2020. Our teams did a solid job of executing Throughout the year in the face of a global pandemic, we hit a significant milestone that many companies aspire to, Achieving non GAAP revenues of over $1,000,000,000 in 2020. We grew non GAAP revenues by 9% EBITDA margin of 48% for each of the full year and in Q4. Our non GAAP subscription revenue grew by 5% on a trailing 12 month basis.
We sustained strong maintenance renewal rates north of 90% in 2020 And the 4th quarter renewal rates held up well despite the cyber attacks on SolarWinds, which we announced on December 14. We completed the TETRY1 acquisition in the 4th quarter. Between our database performance analyzer, Database Performance Monitor via the acquisition of VividCodex and SensiOne, we now have a comprehensive analysis and monitoring portfolio supporting a broad range of database platforms across on premises, native cloud and hybrid IT The environment. Revenue for our database management products continued to grow in the 4th quarter Consistent with recent trends, we expect CenturyOne to help sustain that growth. The database solutions complement Our already strong network systems and application monitoring solutions as well as our efforts to become a leader in hybrid IT monitoring.
Our core IT management subscription growth continues to be fueled by Our MSP business again delivered double digit 15% growth in both the Q4 and the full year, surpassing $300,000,000 in revenue in 2020. We ended the year with more than 25,000 MSP partners that service over 500,000 smallmediumenterprise customers, reflecting our status as a leading provider of remote monitoring and management, security, data protection and business management solutions for MSPs around the world. In December, we announced the confidential submission of a Form 10 registration statement with the SEC for the potential spin off of our MSP business. While the process is difficult to predict, we continue to target Completing the transaction in the Q2. As part of the preparation for the spin off, the MSP business, formerly known as SolarWinds MSC also announced a new brand in December.
Moving forward, the business will be known by a familiar name, Enable, extending the roots of the company to reflect the performance protection and partnership Our MSP partners need to power their clients and businesses forward. Now let me turn to the cyber attack. Since we learned a bit in December, our top priority has been to ensure That our customers are safe and protected and the entire company has been working tirelessly to provide remediation, Take a moment to personally thank our customers, employees and partners around the world for their trust, Patience, dedication, understanding and support during this time. As I came on board and learned more, it became clear That any company would be hard pressed on its own to withstand this type of dedicated and sophisticated attack by a determined nation state. It also became clear that the scope of the attack was much broader than SolarWinds As news and public disclosures emerge about breaches and compromises of other companies unrelated to us, We believe our Orion platform was targeted in this campaign to create a backdoor into IT environments of Select customers.
The threat actor did this by adding malicious code known as Sunburst to versions that we released between March In June of 2020, sunburst has since been removed and is not an ongoing threat in current versions of Orion. Additionally, after extensive investigation, we have not found Sunburst in any of our more than 70 non Orion products. One update that I believe is critical to share is that we previously disclosed that the number of customers that may have installed an effective version of the Orion software platform with less fewer than 18,000. Based on our discussions with customers and our investigations into the nature of Thunder's malicious code and the advanced tradecraft of the threat We believe the number of organizations actually exploited through Sunburst is substantially fewer Then the number of customers that may have installed an effective version of the Orion platform. This is consistent With statements by National Security Advisor for Cyber and Emerging Technology and Neuberger that as of February 17, 9 federal agencies and about 100 private sector companies were compromised.
While our attitude will always be that of One impacted customer is one too many. We currently believe the total number of customers potentially impacted is significantly lower than what was originally feared. We are applying our learning from this event and sharing our work more broadly. Internally, we are referring to our work as Secure by Design and its premise on 0 trust At most confidence in our solutions. We see these investments as consistent with our goal of being a best in class Provider of powerful, affordable and secure solutions.
We have published details regarding our efforts, But in summary, they are focused on 3 primary areas. 1st, further securing our internal environment second, Enhancing our product development environment and third, ensuring the security and integrity of the products we deliver. We've added a level of security and review through tools, processes, automation and To ensure the integrity and security of all of our products, we firmly believe that the Orion software platform and related products as well as all of our other products can be used by our customers without risk of the We also formed a new technology and cybersecurity committee of our Board. 2 current sitting members of our Board, who are CIOs with significant cybersecurity experience and I formed a 3 member committee. This committee has the responsibility to assist our Board in overseeing our response to the cyber We are committed not only to leading the way with respect to secure software development, but also to sharing our learnings with the industry.
Now let me turn the call over to Bart to provide you details of our financial performance.
Speaker 4
Bart? Thanks, Sudhakar, Thanks again to everyone joining us on today's call. Our 4th quarter financial results reflect solid execution, while demonstrating the resiliency of our model in the face of the cyber attack. We finished near the high end of the range of our outlook for the Q4 for non GAAP total revenue, Ending the quarter with $265,500,000 in revenue, representing year over year growth of approximately 6%. Non GAAP maintenance revenue was $124,300,000 in the 4th quarter, since the prior year, driven by consistent maintenance renewal bookings and reflecting sequential acceleration in maintenance revenue growth since the Q2, which was impacted the most by the pandemic.
This growth was driven by solid customer retention as evidenced by maintenance renewal rates of over 90% in the 4th quarter. For the Q4, non GAAP license revenue was $34,500,000 which represents a decline of approximately 23% compared to the Q4 of 2019. The decline in license revenue resulted from the continuing impact of the global COVID pandemic, The impact of the cyber attack and our continued evolution to subscription sales for our on premises products. We continue to see quarter over quarter sequential growth in sales and subscriptions for our on premises products in the 4th quarter. On premises subscription sales resulted in an approximately 3 percentage point headwind to our license revenue for the quarter.
Total non GAAP license and maintenance revenue was $158,800,000 in the 4th quarter, down 1% versus the prior year. Looking ahead, we expect near term headwinds on our business due to the cyber attack and the pandemic. That said, we continue to see demand from both new and existing customers for our products and continue to renew existing customers, although at lower rates. Total ARR reached approximately $960,000,000 as of December 31, 2020, reflecting year over year growth of 14%, which includes approximately 2 percentage points of contribution from our CenturyOne acquisition in the 4th quarter. Subscription ARR grew 17%, reaching $435,000,000 at the end of the quarter.
Subscription ARR growth was not materially impacted by our CenturyOne acquisition. Moving to our subscription revenue. 4th quarter non GAAP subscription revenue was $106,600,000 up 20% year over year, which was driven by 16% year over year growth in our MSP business as well as solid performance in our core IT management subscription Our land expand and retain model has successfully driven sustained growth in our customer relationships. Our subscription net retention rate for the year was 105%. Over the last year, we believe the pandemic has validated importance of digital transformation to the small to medium sized enterprises that depend on our MSP partners for IT management and security it's given us confidence in the strength of our business model.
While we've seen some reduction in spending amongst some SMEs, We've also seen promising trends and uptake of our solutions as well as consistency among our larger MSP partners, resulting in stable net retention rates in 2020. Total non GAAP revenue for the year ended December 31, 2020 was $1,020,000,000 which represents a major As we broke the $1,000,000,000 mark in annual revenues threshold while delivering 9% growth over 20 19 total revenue of 938 $500,000 For the year ended December 31, 2020, non GAAP subscription revenue was $399,000,000 which represents growth of 22% year over year. The growth was led in dollars by our MSP business and from a full year of revenue from our ITSM and Vivid Cortex Products that were acquired in April December 2019, respectively. Non GAAP license and maintenance revenue for the full year in 2020 increased 2% year over year to $622,700,000 Non GAAP maintenance revenue grew at a rate of 7% reaching over 4 Purchasing as a result of the COVID pandemic, the cyber attack in the 4th quarter and the impact of offering previous perpetual license products on a subscription basis, which we expect to yield more revenue over the full duration of the typical customer lifetime.
We finished 2020 with 10.57 customers that have spent more than $100,000 with us in the last 12 months, which is an 18% improvement over over year end 2019. 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 4th quarter. 4th quarter adjusted EBITDA was $127,100,000 representing an adjusted EBITDA margin of 48%, exceeding the high end of the outlook for the 4th quarter. And for the year ended December 31, 2020, adjusted EBITDA was $489,700,000 representing an adjusted EBITDA margin of 48 reflects an adjusted EBITDA conversion rate of 88%.
The conversion rate was positively impacted by lower interest payments on our debt and improved net working capital. Net leverage at December 31 was 3.2 times our trailing 12 months adjusted EBITDA despite the use of $142,000,000 on the acquisition of CenturyOne in the Q4. For the full year in 2020, we reduced our net leverage ratio from 3 point 9x to 3.2x, reflecting the power of our model to complete an acquisition the size of Century 1 and still delever significantly over the course of the year. With $370,500,000 in cash at December 31, we are well positioned from a financial standpoint to continue to invest in the future growth of our business. I will now walk you through our Q1 outlook before turning it over to Sadhakar for some final thoughts.
As it relates to the full year, There is uncertainty around the impact of the cyber attack on top of the continuing impact from the global pandemic. We are encouraged by recent engagements with both prospective and existing customers, and we are cautiously optimistic about growth of our business in 2021. While ongoing customer renewals and pipeline growth are indicators of the health of our business, we feel it is still too early to predict the range of outcomes with the level of precision we have provided in the past. As such, we believe it is prudent to only provide Q1 of 2021 outlook for total revenue, adjusted EBITDA and earnings per share at this point. For the Q1 of 2021, we expect total non GAAP revenue to be in the range of $247,000,000 to $252,000,000 representing year over year growth of negative 1% to positive 1%.
Adjusted EBITDA for the Q1 is expected to be $98,000,000 to $101,000,000 which implies an approximately 40% EBITDA margin. As a reminder, our adjusted EBITDA margin is typically at its lowest level in the Q1 of every year due to lower license revenue And increase in expenses, particularly around social security and payroll taxes. That said, the year over year decline in adjusted EBITDA also reflects Incremental spending related to the CenturyOne acquisition, investments in our MSP business in advance of the spend and the incremental expenses we are making in our security related initiatives. As it relates to 2020 2021 adjusted EBITDA, We expect our investments in security related initiatives to be approximately $20,000,000 to $25,000,000 Non GAAP fully diluted earnings per share is projected to be $0.19 to $0.20 per share, assuming an estimated 318,000,000 Fully diluted shares outstanding. Our outlook for the Q1 assumes a non GAAP tax rate of 22%, and we expect to Approximately $17,200,000 in cash taxes during the Q1 of 2021.
And finally, our Q1 outlook assumes a euro to dollar exchange rate of 1.19 and a pound to U. S. Dollar exchange rate of 1.34. While we are not providing full year outlook, I will say that we expect license revenue growth to improve as we move through the year in all regions and particularly in our EMEA and APJ regions. Based on what we've seen so far in the Q1, maintenance renewal rates are expected to be in the low to mid-80s in 2021.
And we are targeting to return to historical performance in 2022 as we work with our customers to ensure their success and as we continue to further enhance our product portfolio. Increasing the percentage of our recurring revenue has been a focus of ours over the past And recurring revenue is now 86% of our total revenue. We will continue to expand the subscription offerings of our on premises products 2021 and make new subscription sales a priority with our sales teams. As we said previously, we continue to explore the previously announced Potential spin off of our MSP business now known as Enable and continue to target having that transaction occur in the Q2 of this year. With that, I will now turn the call back over to Sudhakar for his closing remarks.
Speaker 3
Thank you, Bart. In my various executive assignments, I have sought to let humility, ownership, transparency, Focused action and a bias towards customer success be my guiding principle. We are committed to practicing these principles We see significant opportunities to increase our relevance to customers and to expand our market by leveraging Our network, systems, applications and database analysis and monitoring tools, along with our Excellent IT service deck and tools portfolio. We intend to integrate our platforms and serve the evolving hybrid to have integrated experiences across automation and configuration, monitoring, visibility, alerting and remediation. These moves will further accelerate our progress towards a greater mix of subscription and recurring revenues.
As we look to the next several quarters and years, we believe that we have a growing market opportunity and we Intent to organize our activities and plans to achieve and in some segments exceed market growth rates over the long term Even as we deliver strong EBITDA margins, as a result of the operating leverage that we have created in our business, To achieve a balance between sustained growth and strong profitability, we expect to take the following key actions. Expand our international go to market investments to capture additional growth and market Accelerate our evolution to our customer success model and further enhance our sales team's Ability to land new customers and expand. We believe this critical evolution will lead to a better customer satisfaction And over time, increase the lifetime value of our customers, continue to nourish our high velocity go to market model, while also expanding with the enterprise and global system integrator motion we started in 2020. Accelerate our offering strategy to comprehensively address the needs of hybrid IT deployments with flexible selectively expand via inorganic investments that both round out our portfolio as well as enhance our ability to capture market opportunity faster. I'll conclude again By thanking our employees, partners and customers for their commitment to and support of SolarWinds, Over 20 plus years, we have earned the trust of our customers by delivering powerful and affordable solutions, And I'm confident that going forward, we will be known for delivering powerful, affordable and secure solutions.
Bart and I will now be happy to address your questions.
Speaker 2
Operator, we're ready for questions.
Speaker 0
And your first question comes from the line of Sterling Auty with JPMorgan.
Speaker 5
Yes, thanks. Hi, guys. You touched upon a number of the key elements, but I wanted to dive back in Specifically around kind of the comments that you made about improvement through the year and kind of the demand picture in 2 ways.
Speaker 6
Number 1,
Speaker 5
I want to make sure I understand how much are you kind of baking in, in terms of improvement in the small piece, which is the licensing, But more specifically, the subscription, are you expecting that the demand for subscriptions will bottom in March And then start to show some improvement through the year?
Speaker 4
Yes, Sterling, I mean, we talked about What we've done so far in the Q4 as it relates to subscription sales being a 3% headwind to license revenue, that's fairly consistent with what we saw In the other quarters in 2020, right? And so we're expecting that headwind to continue in 2021. And like we said, we're going to make subscription sales Priority. So if anything, that headwind is only going to be even a little bit stronger as we move through 2021.
Speaker 2
Right. But I guess
Speaker 5
what I'm asking is the demand impact from the breach, are you expecting the demand for your subscriptions, Not the mix, but just demand for subscriptions in general to kind of hit a bottom here near term and then show improvement through the year.
Speaker 4
Yes, absolutely. As we've been building out our forecast for 2021, Sterling, we expect the biggest impact In the Q1. And then as we move through the rest of the year, we expect demand to continue to improve.
Speaker 5
And then just one follow-up on the maintenance. You gave us Maintenance renewal rates, but I want to understand when you think about the seasonality of when those maintenance renewal contracts come up, What does that mix look like? Because I would imagine that that would be more weighted towards Q4. So are you The biggest maintenance hit might actually not come until Q4. Sterling, there's not really
Speaker 4
a lot of seasonality as it relates to our When I look at what our bookings are from a maintenance standpoint, they're consistent quarter in and quarter out. So Although we have some of our customers that like to co turn to a 4th quarter maintenance renewal date, that's just not a trend that we've seen historically.
Speaker 5
Understood. Thank you.
Speaker 0
Your next question comes from the line of Fred Zelnick with Credit Suisse.
Speaker 7
Sudhakar, I think it's pretty clear that Sunburst is a wake up call for the entire industry. This is not a SolarWinds issue, but an industry issue. And It's good to see SolarWinds taking a leadership position in addressing these types of attacks. I wanted to ask a question that I think may be difficult for you to Just on the future liability and potential litigation related to Sunburst, How are you thinking about any of these liabilities and customer claims and the degree to which SolarWinds might be covered by its licensing agreements?
Speaker 3
Thank you for the question. The point you made last is the most relevant one, which is much like most software We have covered through our end user licensing agreements. And as you mentioned, Sunburst is not just a SolarWinds Specific issue, but it's a broader industry issue. And as you also know, most software vendors Unfortunately, have vulnerabilities that they disclose and correct on a go forward basis. And so we have similar practices At SolarWinds as well.
Speaker 7
Okay. And maybe just a follow-up for Bart. I want to make sure I heard something that you called out and I heard it correctly, which is $20,000,000 to $25,000,000 in security related Initiatives, can you maybe put a finer point to the timeframe and the cost of remediation related to the incident Versus ongoing changes to your business process related to Sunburst?
Speaker 4
Yes, the $20,000,000 to $25,000,000 Brad is the cost that we Incurred throughout all of 2021. And that's a combination of both security initiatives that Sudhakar talked about, As well as just some general increases in some of our expenses such as we expect our insurance costs to go up in 2021. And then there's other charges from some of our professional fees will go up as a result of the cyber TAC as well. So really just the $20,000,000 to $25,000,000 number was to give you some context of what we expected the increase in our expenses to be Not just for 2021, but as we move forward as well.
Speaker 3
And Bart, I'd also like to clarify that these are not Necessarily related to remediation as much as we are looking at these as expansions and investments for us Going forward, and as I mentioned in my remarks, that our aspiration is to support the broader needs of IT, Dev and SecOps, professionals.
Speaker 7
Very good. Thank you so much for taking the questions guys.
Speaker 0
Your next question comes from the line of Matt Hedberg with RBC Capital Markets.
Speaker 8
Hey, thanks guys for the questions and welcome Sudhakar. And thank you for the transparency on the cyber attack. I know it's a fluid situation, but I think we all appreciate The details here. Maybe the first question, can you talk I mean, we're effectively 2 months into the Q1 quarter here. I'm wondering if you could talk about the pace Of new business, kind of the linearity through 2 months versus sort of what you would expect in a normal Q1?
And then secondarily, on the maintenance side of it, You talked about mid, I believe, low to mid-80s renewals this year. Is there a difference between your public and private sector maintenance renewal rates?
Speaker 4
Matt, first of all, the renewal rates that we gave you, the low to mid-80s, that takes into account both our Federal as well as our commercial customers. So that's not a renewal rate that we've historically broken out between those two pieces of our business. So the low to mid-80s range that we gave you reflects both of those as well. And then as far as the pace of our business, the pace of our business in the Q1, Obviously, it's been impacted by the attack, but we're seeing positive trends. And like I said, we expect the Q1 Of 2021 to be the one that's the most heavily impacted, as it relates to new license sales.
Speaker 3
And just to add On to Bart's comments, I have been spending a lot of my time with our customers, both in the public and in the private sector And especially with the petio garment customers spending time with their CIOs, CISOs, highlighting As you put it transparently, the findings from Sunburst as well as the remediation steps, a lot of our customers, as I mentioned in my remarks, Their reaction has been one of understanding and many of our customers, including in the public sector have already upgraded To our remediated code.
Speaker 8
That's great. And then on Enable, the MSP business, When I think of growth there, I think both expanding the number of MSPs, but also expanding what you can sell to them. I guess on that second part, As we progress through this year and beyond, how do you think about adding more services to that business?
Speaker 3
I'll take that, Bart. So the Enable business as we're going to be branding it going forward, We'll continue to expand its portfolio. We recently made some strategic announcements as it relates to our partnership with Sentinel as an example. So for a business that was largely focused on remote monitoring in the past, it has already evolved and continues to evolve into data protection, into security. And in the future, I'm sure we'll explore additional avenues Like analytics and insights as well.
Speaker 8
Thanks guys. Actually maybe Bart just a quick just last Can you remind us again about your exposure to the federal segment? Roughly, what percentage of total revenues is that
Speaker 6
State, local kind of the
Speaker 4
Yes. I mean, that's not a number that we've historically broken out, Matt. It's our federal business is it obviously It's a big piece of our revenue, but it's not a number that we've had that's been big enough that we've had to disclose separately.
Speaker 2
Got it. Thanks a lot guys.
Speaker 1
Operator, we're ready for next question.
Speaker 0
Your next question comes from the line of Sanjit Singh with Morgan Stanley.
Speaker 6
Thank you for taking the questions and congrats on the role of Sudhakar and even bigger kudos for accepting the role just given the headlines in December. But it does seem like the business is proving resilient. And I just wanted to dive into a couple of topics. One on sort of the comment around, this could have happened to anyone, and I think most of us would certainly agree. But is there any sort of we sort of look at SolarWinds, was there any sort of things from an operations perspective that made the To be more or less vulnerable relative to your peers, whether it comes from having this tremendous product inventory teams or anything that like The company is going to do better to shore up any potential vulnerabilities to the operation side.
That's my first question.
Speaker 3
Sanjit, thanks for the welcome. As it relates to why we believe it could have happened to anyone As we deconstructed what the threat actors did, we found malware that Essentially can be injected into any supply chain. That's the reason why we publicly disclosed it so that other companies can Look at their own supply chains and potentially protect themselves from both current and future attacks. As it relates to was there anything specific to the SolarWinds environment, we could not find anything that was idiosyncratic To the SolarWinds environment. And if anything, both our security hygiene, security posture, security The tools are consistent with what is practiced in the industry.
Speaker 6
Got it. And then as you sort of manage through the solar storm compromise and work with your customers, I guess the larger question is what is your vision for SolarWinds as the company sort of comes out of this? And as you look at What the company has been focused on, the strategy, how they sort of balance growth versus margins, Should we see your tenure sort of extending that line of thinking or are you looking to change things Fundamentally, from a strategic perspective, what's sort of your initial thoughts on how the business will be run and managed going forward relative Relative to the past.
Speaker 3
Definitely. My focus will be to Essentially extend the strategy in the following way. I personally believe we have the broadest portfolio, If I may use that term in network systems application and database monitoring combined with our IT service desk as well as our tools portfolio. Going forward, what we intend doing is Integrating them into a way that we can support the hybrid needs of our customers so that they can deploy On premises or in the cloud, and we will be able to provide them consistent capabilities with 1 integrated platform. Additionally, we feel there is a significant opportunity for us to expand our monitoring To first into the automation and configuration aspects of things, then on to alerting and remediation with our IT services As an integrated portfolio such that we are able to support the entire lifecycle of our customers.
That is what we see as a market opportunity for growth going forward. And as we do that, we will continue to balance between growth and profitability And continue to demonstrate the operating leverage that we have created in our business.
Speaker 6
Understood. That's A great overview. If I could sneak one in for Bart. Part of the question is, why is there sort of lingering hesitation On guiding for the full year, if I look at some of your cohorts that sell into similar segments, they've sort of gotten back to an annual guidance cadence. ARR This quarter, your Q1 guidance is more or less in line with consensus.
So the question is sort of what is the fear around providing guidance given that The business was relatively some impacts, but it doesn't seem like there's tons of volatility in the numbers, at least
Speaker 4
Yes, Sanjay, thanks for the question. We like to talk about the fact that recurring revenue is 85% or 80 percent of our total revenue. But we do still have a license piece, a license component as it relates to our revenue. And there's just enough variability in the full year of 2021 and enough there's enough uncertainty around what our new license sales are going to be that we just weren't confident enough to give a full guide. We like to be pretty precise when it comes to guidance.
And there's just enough there's a broad enough range of outcomes that we just weren't confident to give a full year guide at this point.
Speaker 6
Understood. Thank you for taking the questions.
Speaker 0
Your next question comes from the line of Eric Superjour with JMP Securities.
Speaker 9
Yes. Thanks for taking the question and welcome Sudhakar. 1, could you provide some context around the churn in the federal Sector versus the non federal sector. Clearly, this attack was Primarily targeted to the federal customers and it would be helpful for us to understand what impact this is having on the non federal sector in particular.
Speaker 3
Sure. I would say at this point, it's too early to quantify churn as it's been About a little over 2 months since this whole event occurred. The way I would describe our activities Our one of engagement and one of helping customers remediate and Look forward. So through our conversations and as I mentioned, I personally have had many conversations with both private and public sector I would say some customers have taken a vacancy attitude, but not necessarily A focus on churn or replacement at this point in time. Additionally, as I mentioned, The vast majority of the customers that I have spoken to and we continue to engage with have not only upgraded, But many of them also have renewed their contracts.
So those are the indicators I can present to
Speaker 4
you at this point in time, Not so much a specific churn indicator. And Eric, the expected renewal rates that we that I've provided you, the low to mid-80s for the full year, That includes both our commercial as well as our federal customers. So yes, we are seeing a lot of questions when customers are up for renewal. But like Sudhakar said, right now they're taking more of a wait and see approach. It's not that they're immediately turning us off or not Renewing their maintenance contracts.
Speaker 3
And I also believe that is because of 2 important factors. 1 is customers that we speak to and customers who have used multiple software vendors recognize and understand that vulnerabilities And software issues can happen to any vendor. That's number 1. Number 2, that it is a reflection of their
Speaker 9
Okay. Then real quick. On the Enable spin out, can you tell us what the growth was In fiscal 'nineteen, obviously it was 15% fiscal 'twenty. So just curious what the trajectory is there?
Speaker 4
So yes, the MSP business, Eric, just like a lot of other businesses, was impacted by the COVID pandemic in 2020. So 2019 growth would have been slightly higher than that 15% that we saw in 2020, but any of the impact as it relates to growth From 2019 to 2020 was really due to the pandemic and a little bit of the slowdown that we saw in the second quarter. And we saw really positive
Speaker 9
So can we assume that that's a high teens type growth On a normalized basis?
Speaker 4
Yes. Yes, that's the goal.
Speaker 9
Thank you.
Speaker 0
Your next question comes from the line of Brent Thill with Jefferies.
Speaker 10
Hi, this is Bhav Souda, on for Brent Thill. And welcome Sudhakar to SolarWinds. Wanted to ask one quick one There has been a bit of focus on the renewals. And are you this offering any concessions to the customers that are renewing or are these normal conversations that you would otherwise have?
Speaker 3
Our conversations on the renewal front have been normal, other than the fact that In some cases, we have had to explain to customers what we are doing, where we are headed, why they should feel secure, etcetera. If your question is related to pricing or promotion, I would say our behavior has been per what it always has been.
Speaker 10
Got it. And maybe one quick follow-up, if
Speaker 3
I may, on the
Speaker 10
You mentioned some of the investments you're making this year on the product side. I wanted to ask, are Some of these investments, be it
Speaker 3
on the product or the
Speaker 10
go to market side, are they more longer term in nature or I'm trying to assess longer term margins impact
Speaker 8
on longer term margins. Thank you.
Speaker 4
Yes, love. What we talked about primarily was expenses that related To the security incident. So the doctor talked a lot about our secure by design initiatives, and there are going to be some costs associated with that. But like I said, we expect those costs to be in the $20,000,000 range in 2021. So when you're thinking about what margins are going to be long term, What I would tell you is that we think that margins are going to be at their lowest level in Q1 and margins will improve as we move throughout the year.
And then as we look at 2022 and beyond, we're always going to we're going to always weigh investment decisions and try to decide between Both growth and profitability.
Speaker 3
And to your question about whether some of these investments Will yield returns this year versus longer term? Some of the investments that I outlined are expected to yield returns this year, Most likely in the back half of this year and on into 2022.
Speaker 0
Your next question comes from the line of Kinsley Crane.
Speaker 11
Hi, and welcome Sudhakar. And I completely agree with you. I think the more we learn about the nature of this highly manual task, the better we can appreciate
Speaker 3
this could happen to anyone.
Speaker 11
So it's encouraging that customers are agreeing. But in our research, we've also found that adopting 0 Trust is one of the more effective ways for
Speaker 3
Absolutely. So as part of our Secure by Design initiative that I outlined, As I mentioned, I don't look at this as a remediation effort as much as an ability to set the stage for a leadership effort over several quarters years. So one of the key aspects of Secure by Design or a couple of key aspects, I would say, Is that it is premised on 0 Trust principles. And when I say that, that applies both to our infrastructure as well as how we plan to build products going forward. So some of the conversations that I've been having with customers, for instance, is how do we establish Lease privileged access models within both our products as well as other vendors' products that enable the safety and security of our customers.
So this is the point I was making as I was describing that one opportunity that comes up in our conversations with customers is not only how we protect them through our products, but also provide guidance to them across their environments That is rooted on lease privileged access or the zero trust principle and other related constructs.
Speaker 11
Great. That makes perfect sense. That's very helpful. So one more just on the MSP side. I was encouraged See the productivity of the name change to Enable in December, would just love to hear a little bit more color on the decision to adopt what's been a strong brand name For some time and how receptive customers have been so far?
Speaker 3
That's far the reception, but from a partner community Has been very strong in terms of the Enable brand. And as you know, the MSPs business Primary objective is to enable partners to in turn enable our small, medium enterprise customers. So the partners find that this is a nod to the model and are redoubling and recommitted to expanding the business.
Speaker 0
Your next question comes from the line of Rob Oliver with Baird.
Speaker 12
Great. Thank you. Good morning, guys. And hope you're doing okay down there in Austin, tough couple of weeks down there. Sudhakar, one for you and then Bart, I had a follow-up for you as well.
Just Sudhakar, on the subscription And products, it does sound like demand is kind of coalescing nicely around the old Samanage Product ITSM and around database, maybe Cortex. Is that right? And Are there other products in that portfolio of SaaS subscription products that you are optimistic about or perhaps you could take the opportunity to talk a little bit How do you view expanding that portfolio?
Speaker 3
Absolutely. The observations that you made on both the service desk And database are absolutely correct. In addition to that, I alluded to additional packaging and Integration considerations that we are executing throughout this year, that applies broadly to our Call it traditional products based on the Orion platform, including network and system management. So As a result of that, I expect the subscription mix of that business to continue to grow as well. Now if you take A perspective of a few quarters out as we integrate our platforms into much more of a singular Motion, then increasingly our primary motion will become subscription on that particular platform.
So over time, the goal is to improve the mix and expand it from the current 86% to something higher going forward.
Speaker 12
Okay, great. That's helpful color. And I think that ties directly, Bart, into what my follow-up question with you is going to be, which is you guys traditionally have been Agnostic as to how your customers bought it. So clearly, you changed here on this call. And I guess your comment relative to prioritizing Griptian, we go hand in hand with what Sonakar said.
Are there incentives built in there for the sales force and Any other changes relative to the go to market? And I would assume you're going to do
Speaker 3
this and keep consistent with
Speaker 12
sort of It's kind of lean, light go to market model that SolarWinds has always pioneered? Thank you guys very much.
Speaker 4
Yes, Rob. I mean, As it relates to our subscription offerings, like you said, we've been agnostic. At the end of the day, we want the end user to have the ability to purchase In either under either in a subscription arrangement or under our traditional license maintenance agreements, right? And we're not going to change that.
Speaker 12
However,
Speaker 4
From an investment standpoint, we are going to put more dollars behind some of our on premises products and we're going to try to make that a priority as we move forward.
Speaker 6
Appreciate it again.
Speaker 0
Your next question comes from the line of Curt Materne with Evercore ISI.
Speaker 6
Hi, guys. How are you doing?
Speaker 13
This is actually Peter Berkley on for Curt. Thanks for taking the time to answer My first one is, and apologies if I missed this in the prepared remarks, but just wondering if
Speaker 3
you guys have any update just on
Speaker 13
the timing The spin out of the MSC business?
Speaker 4
So yes, we're still expecting that spin out to happen sometime in the second quarter.
Speaker 13
Okay, great. Awesome. And then just one quick follow-up. Just wondering, I mean, it sounds like the cyber attack had more of an impact the licensing piece of the business, which makes sense. But just wondering if it had any impact on the MSP business at all as well?
Speaker 4
There was a slight impact in January just as some of our MSP partners and some of our some of their end customers Assess the potential impact. Once we were able to Assure them that none of our MSP products were part of the cyber attack. We've started to see the MSP business get back to its full.
Speaker 13
Okay, great. Awesome. That's helpful.
Speaker 3
All right. Thanks very much, guys.
Speaker 0
Your next question comes the line of Mohit Gavija with Barclays.
Speaker 1
Hey, guys. Thanks for taking my questions as well. I was wondering if you can I mean, when you initially discussed and announced the spin off last year, You had a framework for the SolarWinds standalone post the spin off and the MSP business, what the growth and profitability framework and profile will look like, right? Obviously, things have changed somewhat. I mean, you're discussing some incremental investments in security and also product related investments, So just wondering if you can sort of like maybe touch upon if any goalposts have moved.
So I think SolarWinds Standalone, you had discussed the lowtomidsingledigits store in the mid to long term MSP business, I think you had discussed mid to high teens. Just curious, Ashish, if you can update us how you're thinking about the 2 separate businesses post the spin off in terms of growth versus profitability? And then I have a follow-up question. Thank you.
Speaker 13
Yes, Mohit, I mean, one of the reasons why
Speaker 4
we didn't provide full year guidance is because there's still a certain amount of uncertainty as it relates to the revenue The goal is to continue when we split the MSP business and the core IT business To have 2 separate companies, they'll have 2 somewhat different financial profiles. The core IT business, We talked about being a mid- to high single digit grower. That will obviously be impacted as it relates to the cyber attack in 2021. But we think that those impacts Short term in nature and we think as we move into 2022, we will continue to look like the company we talked about when we announced the MSP spend last year.
Speaker 2
Yes, operator, let's take one more question.
Speaker 0
Okay. You do have a follow-up with Sterling Auty with JPMorgan.
Speaker 5
Yes. Thanks, guys. So just actually on the spin, I've gotten a number of questions from investors around If there's any change or update in thinking in terms of how the 2 companies would be capitalized. In other words, where would the debt Actually go and would there be any need for any financing actions along through that process?
Speaker 4
Sterling, we're still looking at the potential capital structures of both of the businesses long term and post spend. So when we move into the Q2, we'll have more discussion around that.
Speaker 5
Perfect. Thank you.
Speaker 4
All right.
Speaker 0
There are no other questions at this time. Okay.
Speaker 3
Thank you again everyone for joining us and we'll be in touch.