• Total Revenue: $193 million, a 4% increase year-over-year.

• Total ARR: $695 million, up 7% year-over-year.

• Subscription ARR: $251 million, a 36% increase year-over-year.

• Adjusted EBITDA: $92 million, a 19% increase year-over-year, with a margin of 48%.

• Maintenance Renewal Rate: 98% for the quarter; 97% on a trailing 12-month basis.

• Subscription Revenue: $69 million, up 26% year-over-year.

• Maintenance Revenue: $112 million, roughly flat year-over-year.

• License Revenue: $13 million, down 25% from the previous year.

• Non-GAAP Diluted Earnings Per Share: $0.29, exceeding guidance.

• Cash Flow from Operations: $36.3 million for the quarter.

• Warning! GuruFocus has detected 2 Warning Signs with SWI.

Release Date: May 02, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• SolarWinds Corp (NYSE:SWI) exceeded guidance across key metrics, demonstrating strong start to the year.

• Total revenue reached $193 million, representing a year-over-year growth of 4%.

• Subscription ARR grew by 36%, driven by the successful execution of the subscription-first strategy.

• Adjusted EBITDA for Q1 was $92 million, up 19% year-over-year, with a margin of 48%, the highest quarterly level in over three years.

• Strong customer retention with a maintenance renewal rate of 98% for the quarter and 97% on a trailing 12-month basis.

Negative Points

• License revenue declined by 25% year-over-year due to the focus on transitioning customers to subscription models.

• Despite overall ARR growth, the total revenue growth forecast for the full year remains modest at 3%.

• The macroeconomic environment continues to pose challenges, potentially impacting customer budgets and spending.

• The transition to subscription and cloud models may disrupt traditional revenue streams and customer relationships.

• While subscription growth is strong, the conversion from maintenance to subscription could dilute the immediate financial benefits due to the transition dynamics.

Q & A Highlights

Q: Can you discuss the selling environment and how it compares to previous quarters? A: Sudhakar Ramakrishna, President and CEO of SolarWinds, noted that the selling environment in Q1 has not significantly changed compared to Q4 or previous quarters. The company's value proposition continues to resonate well with customers, and SolarWinds is focusing on what it can control and executing its strategies effectively.

Q: How is the adoption of AI impacting the interest in your observability solutions? A: Sudhakar Ramakrishna explained that it is still too early to identify a strong pattern, but early successes are evident. The company has been investing in AI for about three years, focusing on predictive analytics and reducing alert fatigue, which aligns with their broader value proposition of improving time to value and remediation.

Q: Can you provide more details on the growth drivers behind the 36% increase in subscription ARR? A: James Barton Kalsu, CFO of SolarWinds, attributed the growth primarily to the company's subscription-first strategy, particularly the conversion of existing customers to hybrid cloud observability products. The conversions are happening at a healthy uplift, converting $1 of maintenance into approximately $1.60 of subscription revenue.

Q: Is there a plan to eventually transition all customers to a subscription or hybrid cloud model? A: Sudhakar Ramakrishna indicated that while the company is moving in that direction, driven by product focus and customer value delivery, the transition should not be forced. The shift to subscription is seen as both a value and business model transition, suggesting a gradual shift based on delivering compelling value to customers.

Q: What is driving the decline in maintenance ARR, and how does it relate to subscription growth? A: Sudhakar Ramakrishna explained that the decline in maintenance ARR is not necessarily negative, as it reflects a healthy conversion rate to subscription ARR, particularly through the observability solutions. This is part of a strategic focus, especially in regions like North America, and is now gaining traction in other regions like EMEA.

Q: How does the growth of hyperscalers influence your cloud growth? A: Sudhakar Ramakrishna acknowledged that while there is a positive correlation with hyperscaler growth, it is not a significant part of SolarWinds' business at this time. The company does not rely on this external factor for success, focusing instead on its own strategic execution and product offerings.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.