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SolarWinds Corp (SWI)·Q1 2024 Earnings Summary

Executive Summary

  • Delivered a strong Q1: total revenue $193.3M (+4% YoY) and adjusted EBITDA $92.1M (+19% YoY), both above the high end of guidance; GAAP diluted EPS $0.09 and non-GAAP diluted EPS $0.29, with margin expansion to the highest quarterly adjusted EBITDA margin in over three years .
  • Guidance: Q2 revenue $186–$191M, adjusted EBITDA $85–$88M, non-GAAP EPS $0.21–$0.23; FY24 revenue unchanged at $771–$786M; FY24 adjusted EBITDA raised to $360–$370M; FY24 non-GAAP EPS raised to $1.00–$1.04 .
  • Strategic drivers: Subscription-first transition continues; subscription ARR $251.3M (+36% YoY), total ARR $695.3M (+7% YoY); maintenance renewal rates remained robust (98% in-quarter, 97% TTM) .
  • Capital allocation catalyst: Special cash dividend of $1.00/share ($168M) paid April 15, 2024; net leverage ~2.7x at Q1-end and pro forma 3.2x post-dividend; term loan refinanced in January to SOFR + 3.25% (down 50 bps) .

What Went Well and What Went Wrong

  • What Went Well

    • Exceeded high end of revenue and adjusted EBITDA guidance; achieved highest quarterly adjusted EBITDA margin in >3 years. CEO: “We started the year strong... delivering our highest quarterly adjusted EBITDA margin in over three years.” .
    • Subscription momentum: subscription revenue +26% YoY; subscription ARR +36% YoY; expect Hybrid Cloud Observability (HCO) to exceed $100M ARR in Q2 .
    • Strong renewals and operating discipline: maintenance renewal rate 98% in-quarter, 97% TTM; non-GAAP EPS beat largely driven by improved profitability and one-time tax benefit .

  • What Went Wrong

    • License revenue declined 25% YoY (to $12.8M) as subscription-first focus continues to weigh on perpetual licenses .
    • Total ARR growth high single digits; sequential adds essentially flat per analyst observation; management noted focus on converting maintenance to subscription and fewer new logos in license/maintenance .
    • Macro and legal overhang: cautious top-line guide maintained despite Q1 beat; ongoing SEC enforcement-related risks and broader macro uncertainties flagged in forward-looking statements .

Financial Results

MetricQ3 2023Q4 2023Q1 2024
Revenue ($USD Millions)$189.6 $198.1 $193.3
GAAP Diluted EPS ($USD)$(0.02) — $0.09
Adjusted EBITDA ($USD Millions)$85.1 $87.0 $92.1
Adjusted EBITDA Margin %44.9% 43.9% 47.6%
GAAP Operating Income ($USD Millions)$38.5 $43.4 $46.9
GAAP Gross Margin %88.7% 89.0% 89.2%
Non-GAAP Gross Margin %90.8% 90.8% 90.9%

Segment revenue breakdown:

Revenue Component ($USD Millions)Q3 2023Q4 2023Q1 2024
Subscription$58.8 $67.7 $68.8
Maintenance$116.4 $115.1 $111.7
License$14.4 $15.3 $12.8
Total Revenue$189.6 $198.1 $193.3

Key KPIs:

KPIQ4 2023Q1 2024
Total ARR ($USD Millions)$684.1 $695.3
Subscription ARR ($USD Millions)$233.2 $251.3
Recurring Revenue Mix (%)92% 93%
Maintenance Renewal Rate95% in-quarter; 96% TTM 98% in-quarter; 97% TTM
Customers with >$100k ARR (count)979 1,021

Non-GAAP adjustments and impact (Q1):

MetricQ1 2024
Non-GAAP Operating Income ($USD Millions)$86.7
Non-GAAP Operating Margin %44.8%
Non-GAAP Net Income ($USD Millions)$49.8
Non-GAAP Diluted EPS ($USD)$0.29
Adjusted EBITDA ($USD Millions)$92.1

Guidance Changes

MetricPeriodPrevious Guidance (Feb 8, 2024)Current Guidance (May 2, 2024)Change
Total Revenue ($USD Millions)Q2 2024—$186–$191 New
Adjusted EBITDA ($USD Millions)Q2 2024—$85–$88 New
Non-GAAP Diluted EPS ($USD)Q2 2024—$0.21–$0.23 New
Weighted Avg Diluted Shares (Millions)Q2 2024—~171.6 New
Total Revenue ($USD Millions)FY 2024$771–$786 $771–$786 Maintained
Adjusted EBITDA ($USD Millions)FY 2024$350–$360 $360–$370 Raised
Non-GAAP Diluted EPS ($USD)FY 2024$0.95–$1.00 $1.00–$1.04 Raised
Weighted Avg Diluted Shares (Millions)FY 2024~173.2 ~173.4 Slight ↑
Non-GAAP Tax RateQ2 2024—~26% (assumption) New
DividendsQ2 2024—Special cash dividend $1.00/share paid Apr 15, 2024 ($168M) New

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2023 and Q4 2023)Current Period (Q1 2024)Trend
Subscription-first transition & ARRAccelerating subscription revenue/ARR; conversion from maintenance; adjusted EBITDA mid-40s; improved leverage; CFO previewed non-GAAP EPS and EBITDA guidance Subscription revenue +26% YoY; subscription ARR +36% YoY; total ARR +7%; HCO expected to exceed $100M ARR in Q2 Improving
Observability platform & AIUnveiled database observability; OpenTelemetry; Kubernetes intelligence; AI-powered enhancements; Secure by Design emphasized Added AI services framework across observability/ITSM; enhanced support for Azure, Palo Alto, ServiceNow, Aruba; CISA-aligned self-attestation published Expanding capabilities
Partner ecosystem (GSIs/hyperscalers)Building partner motions; program enhancements; events planned for 2024; partners as force multiplier Transform Partner Summits in Lisbon, Bali, Miami; partners contributing to reach and cost-effective growth Building momentum
Macro environmentSeasonality in Q4; cautious FY24 top-line guide due to macro uncertainty Selling environment similar to prior quarters; conservative revenue guidance; macro remains uneven Neutral/Cautious
Maintenance conversion & licenseHealthy conversion uplift; license down due to subscription focus License -25% YoY; maintenance down as conversions accelerate; conversion uplift ~1.6x Ongoing mix shift
Capital structure & cash flowNet leverage ~2.9x; cash from ops $183M FY23; refinance term loan planned Net leverage ~2.7x at 3/31; pro forma 3.2x post-dividend; refinance to SOFR + 3.25%; CFO framing capital returns Strengthening/liability optimized
Regulatory/legalSEC enforcement risks tied to 2020 cyber incident highlighted Continued disclosures of legal risks; Secure by Design initiatives; published CISA self-attestation Persistent overhang; mitigations underway

Management Commentary

  • “We started the year strong, exceeding the high end of our guidance for total revenue and adjusted EBITDA, and also delivering our highest quarterly adjusted EBITDA margin in over three years.” — Sudhakar Ramakrishna, CEO .
  • “We continue to experience strong adoption of our Hybrid Cloud Observability solutions and expect to exceed $100 million in total ARR for these solutions in the second quarter.” — CEO .
  • “We’re still converting customers at over 1.6x… when we convert $1 of maintenance, we’re converting that over to close to $1.60 of subscription revenue.” — Bart Kalsu, CFO .
  • “In January of 2024, we refinanced our term loan, decreasing the interest rate by 50 basis points from SOFR plus 3.75% to SOFR plus 3.25%.” — CFO .
  • “We are raising our adjusted EBITDA for the full year, which is now expected to be approximately $360 million to $370 million.” — CFO .
  • Special dividend: “$1.00 per share… approximately $168 million, which represents our approximate free cash flow for fiscal year 2023.” — CFO .

Q&A Highlights

  • Demand backdrop: Selling environment similar to Q4; upside driven by execution rather than macro change; balanced Q1, conservative top-line guide reflecting external factors .
  • AI: Benefits seen in predictive analytics, alert reduction/stacking, and service management efficiency; GenAI use cases emerging but not immediate primary driver .
  • Subscription ARR drivers: Healthy maintenance-to-subscription conversion uplift (~1.6x); subscription-first focus reduces license/new-logo activity in perpetual/maintenance cohorts .
  • Hyperscaler tailwinds: Potential positive correlation, but not necessary for success; current reporting more infrastructure consumption-focused .
  • Regional go-to-market: Increased EMEA traction driving observability sales; maintenance declines consistent with healthy conversion factor .

Estimates Context

  • S&P Global (Capital IQ) consensus estimates were not available for SWI in our system at this time due to a missing CIQ mapping, so we cannot present versus-consensus comparisons. As a proxy, management beat versus its own Q1 guidance ranges on revenue ($193.3M vs high end $192M) and adjusted EBITDA ($92.1M vs high end $84.5M), and raised FY24 adjusted EBITDA and non-GAAP EPS guidance .

Key Takeaways for Investors

  • The subscription-first transition is working: recurring mix at 93%, subscription ARR +36% YoY, with HCO poised to surpass $100M ARR in Q2—supporting durable ARR growth and margin expansion .
  • Profitability outperformance: Adjusted EBITDA margin expanded to 47.6% (+380 bps vs Q4), enabling FY24 EBITDA/EPS raises despite unchanged revenue guide—signals operating discipline and pricing/value capture in conversions .
  • Mix headwind to licenses persists: License revenue down 25% YoY as planned; expect continued drag on license sales while subscription metrics strengthen—watch total ARR sequential progression as conversions offset maintenance declines .
  • Cash returns and liability optimization: $168M special dividend and 50 bps rate cut on term loan; leverage manageable (~2.7x pre-dividend, 3.2x pro forma) providing flexibility for selective investments and future capital actions .
  • Macro/legal overhang: Conservative top-line stance and ongoing SEC-related disclosures remain risk factors; Secure by Design and CISA-aligned self-attestation bolster credibility with enterprise/government buyers .
  • Near-term trading lens: Beat-and-raise on profitability, dividend already paid; catalysts include HCO ARR crossing $100M, sustained renewal strength, and partner ecosystem wins; monitor Q2 revenue delivery against guide and ARR sequential trends .
  • Medium-term thesis: Platform consolidation, hybrid visibility, and AI-enabled observability/ITSM should drive continued ARR growth and margin expansion; watch conversion uplift durability and new-logo momentum in subscription cohorts .