Okay, I guess let's get started. Hey, everyone, I'm Pinjalim Bora, midcap software analyst at JP Morgan. I'm delighted to have with us here Sudhakar Ramakrishna, CEO of SolarWinds. Sudhakar, welcome to the conference. Thank you. Thanks for having me. Yeah, great. Let's start with just, why don't you give us a brief introduction about yourself and maybe a little bit about SolarWinds for people in the audience who might not know about it? Absolutely. I've been with SolarWinds since January of 2021, a little over two years, coming up on 2.5 years. My experience is in the broader area of software and systems across a variety of fields, on both the enterprise side as well as the service provider side, spanning multiple technologies, cloud security, virtualization, collaboration, and networking. Okay. SolarWinds obviously has existed for several, at least more than two decades. 20 years. More than 20 years. Yeah. You joined in 2021, you just said. You have made a lot of changes. You have made a lot of progress on the subscription side, with what do you call it? HCO, Hybrid Cloud Observability. I think some investors might not be fully aware of how you have kind of transformed the company from what was to what is. Maybe take a few minutes to talk about those changes. What has changed and what is the evolution that you have, kind of, gone through? Absolutely. SolarWinds was and is a leader in monitoring software technology, starting with network monitoring, database monitoring systems, applications and so on. A natural transition for us was to evolve into the observability space, and I'll talk about how our observability is differentiated. The way to think about SolarWinds today as we have transformed it is we play in three large and growing markets. One is the broader observability space, and I call it broader because there are many connotations of it. Two is the service management space, or ITSM as some would refer to. Three is the database monitoring space, which is also a large and growing market space. The transformation with the introduction of Hybrid Cloud Observability, and more recently our SaaS observability, is we have over 55 point products that customers trust us for historically, we are evolving it into what we call a SolarWinds Platform, which can be consumed in a hybrid multi-cloud environment. What it does for us is it allows us to land and expand seamlessly with customers and also participate in the product-led growth motion, which enables us to keep our operating model and costs at a fairly compelling way. Complementing that is our subscription first transition, which we have accelerated over the last year and a half. That gives us a profile of healthy growth and excellent margins, is the way we are evolving our business. Yeah. Subscription transition, you said you've accelerated. That's. Yeah, results, I guess, speaks to it. Yes ...as a few on what I have seen. On the observability point, right, you said SolarWinds' core was network monitoring, DB monitoring, and all that stuff. Maybe talk a little bit about how does it differentiate, right? How has the platform kind of evolved? I remember, I think initially the core was largely network monitoring- Yes ...right? How has the platform evolved, you know, through this period? You have launched, you said, the SaaS solution as well. Maybe talk about that product evolution. Absolutely. Call it the conventional description of what observability is the combination of logs and traces and metrics. Right. That's how, if you read an analyst report, that's what you'll find. The approach that we have taken to observability is you'll loosely be calling it full-stack observability. What we do is we help customers observe their networks, databases, systems, applications and users and give them insights as to what's happening in their environments. The environment can be a combination of premises and cloud or multi-cloud, as an example. Not only are we doing that, but we are leveraging our service management solutions and integrating them with observability on the same platform. That allows the customer not only to understand what's happening on the network or their environment, but actually remediate it. Many of our mid-market customers, if you think about the trends, what are the key trends in mid-market or for that matter in enterprise? Complexity is growing because applications are growing, multi-cloud is happening. Cost pressures continue to be prevalent. I don't have enough budget to support my needs, nor do I have enough people to manage my environments, and as a result, productivity is going down. The approach we have taken with the SolarWinds Platform by uniquely combining these capabilities is to give the best time to value for customers, best time to detect their issues through observability, and best time to remediate through the integration of observability and incident management or service management. That's where we bring our AIOps capabilities to remediate issues, identify issues, predict issues. That's been an effort for the last two years as we transformed. Is there... I mean, you know, as you were saying, right, initially if people think about observability, think about APM. Yeah ...logging, now more and more people are talking about full stack. What you're doing sounds like more full stack. It is already more full-stack. We kind of basically, if you wanna think about it, skip the generation. To complicate the observability discussion, there is everybody latching onto the term observability without fully defining it. For instance, there is database observability, there is security observability. Some vendors call themselves security observability vendors. In essence, it's the same product. The approach that we have taken when we think about full-stack is the ability to correlate across all of these and pinpoint. As an example, if some user is saying, "Hey, my website is loading slower than what it normally loads," that is the problem statement. That challenge can happen in the application, the database, the network, or the server on which it is running. The ability of a system like ours, the SolarWinds Platform, to identify across all of these and then be able to pinpoint is the best way to identify and resolve issues for our customers. It improves time to resolution, it reduces their cost of downtime, and it improves their productivity. That's the value proposition that we are pitching, as opposed to saying, we think there is an issue in the database and we stop, and it is somebody else's problem to solve it. Those types of problems can potentially be solved in very large enterprises with very large number of resources. For the typical enterprise, they don't have the ability to do it, and that's where we come in. To put a final point on observability, is the stack that you have today, is it able to kind of observe some of the newer workloads... Absolutely. microservices based architectures? Absolutely. The product that we are shipping already observes Kubernetes containers and other things already. Got it. Okay. So how do you kind of say the differentiation is versus a Dynatrace or a Datadog, right? Observability, everybody kind of thinks about New Relic, Dynatrace, Datadog. I don't think many people are still, you know, in the, in the mindset of thinking SW or SolarWinds in that bucket. How do you differentiate versus these other guys? It is just the ITSM linkage that those guys cannot really talk about. That is definitely one aspect of it. You started addressing it in the context of full stack. We don't look at it simply as an application-only model of observability. For instance, acknowledging and understanding how networks and applications correlate to them is not something that they can readily do, because they just don't have the heritage of being able to do it. That notwithstanding, the approach we take is we have more than 300,000 customers in the world that are our customers. We retain them at a very high level, upwards of 90%. What are their problems is what we focus on, versus trying to fit a certain archetype of observability. In fact, I was in the Dynatrace conference a few months ago. I talked to some customers who were saying, "Yeah, we are using Dynatrace or we're using Datadog, but we are using SolarWinds for network performance monitoring." Is there a reason that those guys cannot do network performance monitoring, or? It is not part of their product portfolio right now because they strictly look at it from an application- Mm. monitoring perspective, which is the reason why I think while observability as a buzzword is very, very common, the individual implementations are very different. Our focus is, how do I get the best time to value to customers? How do we give the best time to identify issues and resolve issues? That's what's contributing to our growth. Yeah. Who do you see in the market mostly in this observability space? If you think about the broader category of observability, because more and more monitoring is getting included in the broader observability category, there are traditional competitors like the Micro Focus of the world, the Cisco of the world. We see the likes of LogicMonitor in network and infrastructure monitoring. You mentioned a few names. Most of us are looking at similar problems, not the same problem from a customer standpoint. Yeah, yeah. Yeah, understood. Let's talk about macro. I think many investors are concerned about kind of the health of technology spend in general. There is a lot of focus on kind of SMB spend as well, narrowly. You had a good quarter in Q1. You mentioned on the call that your large customer base and, or diversified customer base, I should say, is kind of proving resilient. Maybe expand that a bit more. Talk about what you are seeing from a macroeconomic perspective and how are you kind of responding to the changing environment? Absolutely. It is true that there are macroeconomic challenges, but what I will highlight is across all our regions, our demand or pipeline is actually increasing, not shrinking. That's Number one. Number two is, as I mentioned, we have a very large install base, therefore, we are not dependent on any one sector or class of customers for us to sustain our growth. Number three, what we are seeing is that our technologies, because of the value proposition that we deliver, are increasingly must-have versus nice-to-have. Last but not least, in terms of cost and value, we are probably more compelling and superior to alternatives out there. That's causing customers to contribute to our success. Interesting. Yeah. Okay. The Pipeline continues to increase, not shrink. That's a, that's an interesting comment. I want to talk about the ITSM side of the business as well, right? Yeah. There are a few players, you know, legacy players that are playing there. BMC, Ivanti is another. Yep. player we hear. Yep. There are some newer ones as well. Right. ServiceNow is the big one. Yeah. There are some newer players like Freshworks, and I think Atlassian is trying to get into that space as well. Yeah. Talk about kind of your ITSM product strategy in general. How are you thinking about this market? Our service management or ITSM solution is a 100% SaaS-based solution. One of the key value drivers that we focus on, which is true across our portfolio, but especially true in service management, is our time to value. Oftentimes, when customers think of service management solutions, they're thinking about long lead implementation cycles, long time to return value, which in this economic times is better for them to simply postpone it than to actually do it. Whereas with our solutions, they're able to see value almost instantaneously by deploying it very, very quickly and leveraging the SaaS-based solutions. Two is we continue to innovate in that. In fact, just last week, we announced, call it our AI-powered chat systems integrated with service management that allows them, or them being our customers, to help their end users automate their travel ticketing, resolve their travel tickets much faster. The human inter-intervention is not as great, and consequently, enterprise productivity goes up. That's, that is a, call it what I'll call the organic part of participating and growing that market. In addition to that, the incident management, the runbook automation aspects of ITSM are on the same platform being integrated with observability. When you help a customer automate their environment, then visualize it, then observe it, then we are also helping them remediate to the degree that the customer is able to deploy the full life cycle. That's where it's becoming more complementary to our overall portfolio, but also participating in a large, independent, growing market. When you say you help remediate, because ITSM in a broader sense is more about ticketing, right? Correct. You create a ticket. Correct. It sounds like you have kind of an orchestration layer as well. Yes, we do. As part of the incident management and incident resolution, I'll give you a very basic example. Let's say we do the visualization of the environment, and we detect that your system is outdated from a patch standpoint. We should be able to automatically initiate that patching and implement it based on corporate policy, rather than have to wait for somebody to do it, which takes time, which creates a potentially, a security challenge, and if it is unnoticed, can be a threat. Those are some of the things that we do in our service management solution that typically vendors don't do and customers don't expect. Yeah. Yeah. In that market, then, who do you see mostly? Because I hear, maybe correct me if I'm wrong, BMC and Ivanti are apparently raising prices and are disenfranchising some of their customers, I is what I hear. We definitely get our fair share from all of those vendors and more, but one of our focus areas in the last six, nine months has been to work more through our partner community and get them the level of enablement and sophistication to drive the service management business. What it allows us to do is expand our footprint on a low CAC basis. Mm. So use partners- Absolutely. As kind of the extended feet on the ground. Absolutely. Okay. Our service management solutions are architected, I would say, so elegantly that we are improving and delivering margins on the service management solution that seem like a perpetual software margin. That is not something that you would expect in a SaaS business. That's number one. Number two is, unlike some of the competitors that you mentioned, our retention rates in service management business are almost the same as our perpetual business. That's why I'm very excited about that segment as a long-term growth opportunity for us. Is it possible to kind of understand the mix of the business around observability and ITSM? We typically don't break it out that way, quite simply because we run the company as a portfolio- Mm-hmm. Not as, like, individual business units and such. Just to give you a sense for how to think about it, the broader observability category, which includes all our monitoring solutions, is still the largest. Between 75% and 80% of our business, give or take. The remaining is service management and database monitoring, but those segments are growing much faster as a result of them being on a smaller base and because the market sizes are fairly significant. Yeah. Yeah, understood. What about just the implementation, time to implementation, on the ITSM service management side? In general. Freshworks, I think- Yeah. Is very small. Yeah. ServiceNow is probably on the other end. Small. Exactly. We have an internal metric that we track, which we don't talk about publicly, but an internal metric to give you a sense for how to think about this is 90% of our customers who buy our solutions, can be anything, could be service management, observability, Hybrid Cloud Observability, have to get value and proven value within 60 days. That's the expectation that we set for ourselves. That's where our customer success teams come into play. That's where the simplicity of our solutions comes into play, and the ability to upgrade, deploy comes into play. Yeah. Okay. One big portion of your business is obviously the maintenance base. We have seen kind of the gross retention on that maintenance base, I think continues to improve. Mm-hmm. In 2022, I think in Q1 as well, if I remember that correctly. What is driving that improvement in the kind of the gross retention? A few factors, I would say. The first factor is ongoing reinforcement of the trust that customers have in us and the fact that I mentioned earlier about being must-have versus nice-to-have technologies. That's one part of it. Let's say out of the 93%, 94% that we reported in Q1, about 90% is directly attributed to that. The rest is attributed to more economics, like price increases, inflation, and those types of things. Got it. Okay. Understood. How should investors kind of think about that conversion, right? We have seen a lot this picture play out a lot of times in different companies as this maintenance base kind of converts over time. I'm sure the renewal rate that you're talking about does not include probably the people - the companies that have already migrated, right? What are you seeing with that migration? Typically, it's more than dollar for dollar. Yeah. It's more, you know, 1.82 I have heard. Yeah. in other companies. What are you seeing? The way to think about conversion of the base is we are not doing a like for like conversion. By that, what I mean is, I'm not simply taking a network performance monitoring customer and converting them to subscription of network performance monitoring. We are trying to get them to Hybrid Cloud Observability, ideally to Hybrid Cloud Observability plus service management. Oftentimes in those accounts, there's also expansion possibilities, we are trying to harmonize the expansion. That's where we're getting the 1.8x-2x uplift, as opposed to, let's say, other vendors that have reported more like 1.2, 1.1. That is one possibility for us. The other possibility or opportunity which we are showing growth in is the expansion of, call it, the latent competitive basis, whether it is Cisco, BMC, Micro Focus, and so on. There's a very large market opportunity out there for technology refresh. To the degree that we are able to deliver a compelling value proposition to customers, we can get our fair share, and we are beginning to get more and more of that as well. The combination of these two factors is what's driving subscription growth for us. Is that the... What is the word I'm looking for? Kind of the trigger for somebody to convert? Absolutely. the refresh cycle? Tools consolidation is a big element to cloud modernization, tools consolidation. These are two drivers for us. Yeah. As you think about 2023 and maybe 2024, are you leaning in on that migration at this point? Definitely. We are definitely leaning in the sense of providing compelling value to customers, creating incentives for our sellers and our partners. We are definitely not forcing customers into a certain paradigm. Our belief is you don't want to force, you want to deliver it by value, and you motivate through that. By doing that, we are not having to unusually discount things. We are getting the full value and price because that builds the base for us for future years in terms of the subscription ARR growth that we are delivering. Yeah. you're not forcing anybody. You're kind of incentivizing sales. Absolutely. Giving them value is the way I would look at it. Yeah. Yeah. Yeah. Got it. We have talked about product evolution. We have talked about the company evolution. Maybe talk about the go-to-market evolution as well, how that has changed. Have you brought in more partners? Is that mix changed? Talk about that. The historical model of SolarWinds is what we call inside sales model. People talk about product-led growth today. In fact, we did product-led growth several years ago because of the simplicity with which somebody could download something, try it, and buy it. That model continues to exist and is the basis for a lot of our go-to-market. However, we feel like there's a lot of opportunity for us to grow in other vectors as well. Three things that I'll mention. One is, we have increasingly participated and promoted global system integrators. We announced specific strategic deals with HCO and Infosys and others. They are the ones taking us into the larger enterprise settings. HCO has essentially OEM'd our Hybrid Cloud Observability as their own product called iObserve. The significance of that is all of HCO sales carries that product and gets compensated on it. That way it's a force multiplier for us and a net new add for us. Two is, you may have heard about our partner program called Transform, and we are driving a lot more partnerships across the geographies, both in terms of specific partners as well competencies, service management as a competency, database as a competency to expand the footprint. Third, which is more of a emerging play, is with hyperscalers. Today, our solutions are available on AWS Marketplace, Azure Marketplace already, but we're also working with their field teams to penetrate deeper into both mid-market as well as large enterprises. when you say PLG is a large part of it, do you have a direct sales force at all? Yes, we do. Okay. We do. We have selectively added teams in various geographies over the last two years. We have an inside sales motion, which is still the predominant motion, but we've also supplemented it with outside sellers who are enterprise class sellers who can do consultative selling. Same goes for our technical salespeople as well. Yeah, enterprise sales. How do you know, maybe I'm getting into the weeds here, but when you're setting quotas for these enterprise salespeople, right? You have these three different kind of things, right? Is that... Are you kind of tuning the dials a bit between the three? Absolutely. A lot of it is based on territory, account mapping, propensity, remaining runway to go. We use a number of factors to motivate sellers and give them enough opportunity to sell. Yeah. Yeah. Have you disclosed the mix between direct and indirect, by the way? Direct and indirect, the way to think about it is about 2/3 of our business goes through or flows through partners, either fulfilled or originated. One-third goes direct. Oh, interesting. You do have origination as well for partners? Absolutely. Absolutely. Absolutely. That in fact, we call it channel initiated. Right. The channel initiated component of our business continues to grow. I wanna ask you about the organic growth on subscription ARR. Like how do you think about a more sustainable growth for organic subscription ARR, you know, not including the maintenance conversion as you, as you look forward? Internally, the way we look at it is when we look at our growth and growth rates and so on, we tend to discount some of our forfeited maintenance. I don't. When I talk about conversions, we use conversions as a convenient term. Most of our conversions are a result of maintenance conversion and expansion conversion of original point products into HCO. Otherwise, you'll not be getting the lift that we're getting of 1.8 or two. You'll be getting it more closer to 1.1.2. I'm less concerned about, as you call it, the organic. In my mind, that entirety is organic. Mm. What is truly organic on top of that is what we call the new part of our observability business, which is the res-replacement or the displacement of the competitors. That is a piece that I'm also very excited about because that's contributing meaningfully to our subscription growth. Yeah. Yeah. Understood. Margins. SolarWinds is a highly profitable company, unlike many software companies. I think you have over 40% operating margins, EBITDA margins. How should investors kind of think about that margin trend as you focus on innovation and driving ARR growth? We believe we have invested in our products and also go to market to the point where there is room and runway for us to organically grow top line. We don't need to rely on inorganic moves to grow our top line. In Q1, we delivered almost 42% of EBITDA. The way to think about us is, in the foreseeable future, we'll be achieving mid-40s EBITDA margins. That's our longer term model, from a EBITDA standpoint. That's the best input we are providing at this point in terms of how to think about EBITDA margins. How do you, what drives that expansion across the model? We are a very leveraged company, meaning, we have significant operating leverage. If, even if you think about Q1, our top line grew at a certain percentage between 5% and 6%, but our bottom line grew much faster. That's because of, for every new, net new dollar of revenue that we generate, we put a lot of it to the bottom line. That trend will continue as we get to the 45% margins. Some of it is going to be driven purely through top line growth. Yeah. One question, I had was on leverage ratios, right? You're a cash generative kind of scale software company. You do have, I think, 3.8x or something like that. Yeah. about, leverage ratio. What do you think about the kind of optimal leverage ratio for a business like SolarWinds? We have a target of reducing our net debt or net leverage to below three. We are on the path to doing it. We paid a significant amount of our debt last year, close to $700 million. We generate a lot of cash, as you pointed out. As the year progresses, even in 2023, we'll be evaluating whether we should pay down more debt. We are committed to getting the leverage ratio below three. Leverage ratio below three. Have you set a timeframe on that? Not yet. I would say within a couple of years is what we are looking at. Got it. In that ballpark. Got it. Let me see if there are any questions in the room. Yes. Can we have a mic, please? Sorry if I have this perfectly right. You have a consumption portion of your contracts for SaaS, is that correct? Yes. Okay. As you think about maybe somebody you signed 12 months ago to a SaaS contract, how much of that contract is that consumption sort of portion of it? When you think about consumption as you described it, for us, it's mostly consumption that is either in nodes or licenses. It's not in consumption in terms of like bytes of usage and so on and so forth. We don't look at it in that way. It looks at it as, let's say we sold 100 nodes, then did 100 nodes get deployed, is the way we look at the consumption of the licenses that we sell. My question was a little bit, are you adjusting the cost structure to your cloud costs? Yes. That's not the case or it is? I'm not Is there To some degree, it will be, especially if you think about logging technologies and such, which tend to be storage intensive. Going back to the service management margins that I was describing, there's not a lot of data that gets stored there. If you were to build a SIEM as an example, you will have a lot of data that will have to be stored and processed. That is where some of the consumption costs as a fixed cost start kind of escalating. I would say we are not there from having to deal with that situation at this point. More appliances, nodes that really drive consumption. Exactly. not the data through those nodes. Exactly. Thank you. We do that, but it's minuscule compared to where we are. [audio distortion] It's fairly common in the maturity of a technology company that we put a lot of emphasis early on in the product. You know, we have to engineer a great product. It has to really get shaken down and see that it will succeed in the marketplace. At some point, it seems that you have to start to balance that out with a strength in commercialization. Is that kind of where you're at right now? If you are, what's next in the area of commercialization that you have to get better at? Absolutely. I'll address it in a, in a few ways, and I understand the spirit of your question because there's no such thing as one is done and the other starts. They're both continuous, right? We continue to expand and improve and innovate on the product side as well. Whereas, what I can say is we mentioned HCO or Hybrid Cloud Observability. That's in classic flywheel motion at this point. So it's incremental innovation, not really ground up stuff. That's where we are. On the commercialization side, I would say our focus on the global system integrators, the focus on hyperscalers, and even to some degree, the specialization of our partners, is in earlier stages rather than in true flywheel motion. So if you think about it in the context of later half of 2023 and 2024, those will be priority areas for us to expand. The other thing I would say is that we have done a much more data and science-based segmentation approach to the world on our potential. We'll be looking at where do we target to get maximum impact so there are a lot of white spaces as well. That'll be in the context of 2024 planning. Anyone else? Sudhakar, I wanna ask you about HCO, that you have and you have recently, I think late last year when you launched the SaaS. Yes. -solution. Yes. How are you thinking about that playing out, right? Are you leading with HCO or SWO? How is that transition going to play out? When we conceived HCO, our premise was very few customers, if any, will be pure 100% SaaS. They'll always be a focus on hybrid and multi-cloud. The idea behind HCO was get the hybrid cloud stuff done and use that as a continuum into SWO. Consequently, what happens is, when a customer buys Hybrid Cloud Observability, they have peace of mind saying, "If ever I choose to go to a full SaaS model, the same vendor can do that for me," as opposed to having to relook at various options. That is the comfort that we've given them. As time progresses on the SolarWinds Platform, the lines will get blurred, and you may be a HCO customer, let's say with 100 nodes today. You may end up having 30 nodes on premises, but then 70 of those are in the cloud. You earlier spoke about the modern Kubernetes clusters and such. Let's say your environment evolves more from, let's say, a virtualization model of VMware to a Kubernetes cluster. We are able to monitor those and shift as your assets shift. As customers kinda move? Exactly. As customers move or mix and match. Yeah. -how, you know, the procurement, model has to probably change, right? That's why we are trying to simplify the pricing models to nodes and users and so on. That'll allow them the fungibility to move from one paradigm to another paradigm. That's going to be a multi-year cycle. We are just in the beginning stages of it. Okay. I guess we are out of time. Thank you so much. Thank you. for the time. Thank you, Dev.