SolarWinds Bets Future On Subscription, Recurring Revenue

‘Our expanded offerings portfolio and our expanding market opportunity, which we believe will amount to approximately $60 billion by 2025, further reinforce our goal of achieving at least $1 billion in ARR by 2025 with a compounded annual subscription ARR growth north of 30 percent over that time period,’ says SolarWinds President, CEO, and Director Sudhakar Ramakrishna.

A big increase in subscription revenue has executives at IT management and observability technology developer SolarWinds predicting it will see $1 billion in annual recurring revenue by 2025.

SolarWinds President, CEO, and Director Sudhakar Ramakrishna Thursday told financial analysts during the Austin, Texas-based company’s fiscal 2022 first quarter analyst conference call that SolarWinds is continuing to see growth in its subscription revenue.

“Our expanded offerings portfolio and our expanding market opportunity, which we believe will amount to approximately $60 billion by 2025, further reinforce our goal of achieving at least $1 billion in ARR by 2025 with a compounded annual subscription ARR growth north of 30 percent over that time period, and while building EBITDA margins in the mid-40s,” Ramakrishna said his prepared remarks.

[Related: SEC’s SolarWinds Probe Could Expose Undisclosed Security Breaches: Report]

While SolarWinds’ overall revenue for its first quarter of fiscal 2022 rose 2 percent over the same period last year, subscription revenue year-over-year growth was 37 percent, Ramakrishna said.

“This was supported by our largest customer converting to term subscription,” he said. “We continue to drive a subscription-first mindset and continue to believe that we can grow both top line and subscriptions simultaneously. We finished the first quarter of 2022 with 852 customers that have spent more than $100,000 with us in the last 12 months. This is an 11-percent improvement over the previous year.”

SolarWinds CFO Bart Kalsu said during his prepared remarks on the call that he expects subscription revenue to grow thanks to the company’s subscription-first mentality.

Kalsu did note that that large customer Ramakrishna said converted to a subscription arrangement, and which also happened to be the company’s largest maintenance customer, contributed about 9 percent of the 37 percent year-over-year growth in subscription.

“Notwithstanding this conversion, our subscription revenues still grew beyond our expectations, reflecting, albeit early in our journey, the success of our subscription-first efforts,” he said.

However, Kalsu said, an increase in subscription revenue is leading to a decrease in license sales and subsequent sales of maintenance contracts. For the quarter, while subscription annual recurring revenue rose 30 percent over last year, total license and maintenance revenue fell 5 percent.

When asked by an analyst during the question and answer portion of the conference call, Ramakrishna said SolarWinds is approaching subscriptions less as a business model change and more of a value proposition extension.

“So typically, when customers evolve to our subscription model, they‘ll be using more than, let’s call it, one product of ours and look at the proposition as helping them consolidate, let‘s say, more vendor products, reduce the tools crawl, and so those become the conversations,” he said.

SolarWinds is building a pipeline for subscriptions, Ramakrishna said.

“We are ... looking ahead 90 days or 180 days from when customers are coming up for their maintenance renewals and actively discussing with them the opportunity to evolve the subscription,” he said. “So that‘s one source of pipeline. The second source of pipeline is our new sales teams themselves proposing these solutions to customers along a number of sales plays, tools crawl consolidation being one, integrated visibility being another, and so on.”

When another analyst asked about SolarWinds’ January acquisition of federal government services provider Monalytic, Ramakrishna said it sprang from Monalytic’s strength in the Federal and public sector space. He also said the Monalytic team is already totally integrated with the SolarWinds’ team.

“I can also say that more and more of our federal customers are engaging with us, and our federal team is very well coordinated as it executes not only the first half of this year, but as it prepares for Q3 and beyond which, as you know, is the largest fed spending quarter,” he said.

For the quarter, which ended March 31, SolarWinds reported total revenue of $176.9 million, up slightly from the $173.9 million the company reported for its fiscal 2021 first quarter.

That included subscription revenue of $38.7 million, up from $28.3 million; maintenance revenue of $115.5 million, down from $120.7 million; and license revenue of $22.6 million, down from $24.9 million.

The company also reported a GAAP net loss of $4.7 million, or 3 cents per share, lower than last year’s net loss of $7.1 million, or 5 cents per share. On a non-GAAP basis, SolarWinds reported net income of $37.6 million, or 24 cents per share, down from last year’s $41.8 million, or 27 cents per share.

Looking ahead, SolarWinds said it expects second quarter total revenue to rise about 2 percent over last year to the range of $174 million to $177 million. It also expects non-GAAP earnings per share of 20 cents.

For all of fiscal 2022, SolarWinds expects revenue to grow by between 2 percent and 4 percent over last year to reach $730 million to $750 million. The company also expects non-GAAP earnings of 88 cents to 95 cents per share.

SolarWinds share prices Thursday fell 6.6 percent to close at $11.71 per share.