SolarWinds reported a strong start to 2024, exceeding guidance across key metrics and demonstrating the value of its platform solutions.
Total revenue reached $193 million in Q1, representing a 4% year-over-year growth.
The company saw a 7% growth in total Annual Recurring Revenue (ARR) during Q1 2024.
Subscription revenue grew by 26% with subscription ARR growing 36%, highlighting the success of the subscription-first strategy.
Adjusted EBITDA for Q1 was $92 million, marking a 19% year-over-year growth and the highest quarterly level in over three years.
The maintenance renewal rate was 98% for Q1, and the trailing 12-month rate increased to 97% from 96% at the end of Q4.
Business Strategy and Execution
SolarWinds continues to evolve from a monitoring tools provider to a comprehensive solutions provider across hybrid and multi-cloud environments.
The company is on track to exceed $100 million in total ARR for Hybrid Cloud Observability solutions in Q2 2024.
SolarWinds celebrated its 25th anniversary, reflecting on its growth from a monitoring solutions provider to offering full stack observability, database monitoring, and service management solutions.
Product and Market Developments
Enhanced observability offerings with support for various technologies and platforms, including Azure, Palo Alto, and ServiceNow.
Continued enhancement of AI services across observability and service management solutions to reduce alert fatigue and manage complexity.
SolarWinds announced its alignment with the Cybersecurity and Infrastructure Security Agency’s Secure Software Development framework, reinforcing its Secure by Design initiatives.
Go-to-Market and Partner Ecosystem
Significant progress in aligning go-to-market strategies with the subscription-first approach, including investments in the partner program.
The Transform Partner Summit highlighted the opportunities created by working with and through partners.
Financial Outlook for 2024
Q2 2024 revenue is expected to be between $186 million and $191 million, with adjusted EBITDA projected to be $85 million to $88 million.
Full year 2024 revenue guidance remains unchanged at $771 million to $786 million, with adjusted EBITDA expectations raised to $360 million to $370 million.
Closing Remarks
SolarWinds remains focused on addressing the increasing complexity of customer environments and meeting their needs for tool consolidation, security, and cloud readiness.
The company is poised for continued profitable growth, driven by its platform strategy and execution discipline.
Question and Answer
Selling Environment and Results
Question
How does the current selling environment compare to previous quarters, and how much of the company’s recent success is attributed to execution versus market conditions?
Answer
The selling environment remains consistent with previous quarters, with the company’s value proposition resonating well with customers.
The upside to estimates is primarily due to the company’s execution and focus on controllable factors rather than significant changes in buying behaviors or selling patterns.
Observability Solutions and GenAI Adoption
Question
As GenAI adoption increases, is there a noticeable impact on customer interest and adoption of observability solutions, or is it too early to determine any specific trends?
Answer
While it’s still early to identify a strong pattern, the company is experiencing early success and traction with GenAI, particularly in areas like predictive analytics, alert fatigue reduction, and service management platform efficiency.
The ability to implement GenAI capabilities within the observability platform exists but is not an immediate or high-demand feature from the industry.
Subscription ARR Growth and Composition
Question
Can you provide more details on the drivers of subscription ARR growth, specifically the contributions from expansions within the existing customer base versus migrations?
Answer
Subscription ARR growth is primarily fueled by the company’s subscription-first strategy and the conversion of existing customers to the Hybrid Cloud Observability product.
The healthy uplift in conversions, with $1 of maintenance typically converting to almost $1.60 of subscription revenue, is a significant factor in driving subscription ARR growth.
Company Growth and Shift to Subscription Model
Question
The company’s total revenue growth guidance for the year is lower than the total ARR growth rate. Is there a scenario where the company phases out new perpetual licenses and fully transitions customers to a subscription or hybrid cloud model over time?
Answer
Over time, there is a possibility of phasing out new perpetual licenses and fully transitioning to a subscription model, driven by the company’s product focus, packaging, and value proposition.
However, this transition should be based on the value delivered to customers and not forced, as the company views the subscription transition as a value model transition as much as a business model transition.
The trends in subscription growth, increased consolidation around the SolarWinds platform, and the ability to up/cross-sell to existing and new customers suggest a gradual shift towards a subscription-based model.
Maintenance Migration Strategy and Impact on New Logo Adds
Question
Has the company implemented any new strategies or initiatives to drive maintenance migration, particularly within the observability solutions, and how has this impacted new logo additions?
Answer
The company’s strategy for maintenance migration to subscription, especially for observability solutions, involves starting in North America and expanding to EMEA and APJ.
The increased traction in EMEA, as part of the flywheel motion initiated in 2023, is driving observability solution sales and contributing to the decline in maintenance base.
The focus on migrating existing customers to subscription products may result in a decrease in new logo additions to the license and maintenance space.
Hyperscaler Cloud Growth as a Leading Indicator
Question
Should the acceleration in cloud revenue reported by hyperscalers be considered a leading indicator for SolarWinds’ cloud growth, particularly with the increasing contributions from GenAI and other projects?
Answer
While the hyperscaler cloud growth may provide a tailwind for SolarWinds, it is currently not a significant part of the company’s business or a dependency for success.
Q1 Results and Full-Year Guidance
Question
The company delivered strong revenue performance in Q1 but reiterated its guidance for the full year. Does this indicate that some of the outperformance in Q1 was due to deals being pulled in from other quarters, or is there a more cautious outlook for the remainder of the year?
Answer
The balanced performance in Q1 suggests that the outperformance was not due to deals being pulled from other quarters.
The full-year revenue guidance is a result of considering all external factors, including macroeconomic conditions, and maintaining a conservative approach to modeling.
As the year progresses, the company will continue to provide updated guidance.
