SolarWinds Corporation
Q1 2015 Earnings Call Transcript

Published: 29 Apr 2015

[Operator:]

Good afternoon and welcome to the SolarWinds First Quarter 2015 Earnings Call. This call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. Now at this time, I'd like to turn the conference over to Mr. Dave Hafner, Director of IR. Please go ahead, sir.

[Dave Hafner:]

Thank you, Melissa. Good afternoon, everyone, and welcome to SolarWinds first quarter 2015 earnings call. With me today are Kevin Thompson, our President and CEO, and Jason Ream, our Executive Vice President and CFO. Following prepared remarks from Kevin and Jason, we'll have a brief question-and-answer session. Please note that this call is being simultaneously webcast on our Investor Relations website at ir.solarwinds.com. Please remember that certain statements made during this call, including those concerning our financial outlook, our expectations regarding growth and profitability, our market opportunities, areas of focus for our business, and our product plans and releases are forward-looking statements. These statements are subject to a number of risks, uncertainties, and assumptions described in our SEC filings, including our Form 10-K for the fiscal year ended December 31, 2014, which was filed on February 23, 2015. Should any of these risks or uncertainties materialize or should any of our assumptions prove to be incorrect, actual company results could differ materially and adversely from those anticipated in these forward-looking statements. These statements are also based on currently available information and we undertake no duty to update this information except as required by law. Precautionary statements regarding these forward-looking statements are further described in today's press release. In addition, some of the numbers during this call will be presented on a non-GAAP basis. Our use and calculation of these non-GAAP financial measures are explained in today's press release, and a full reconciliation between each non-GAAP measure and its corresponding GAAP measure is provided in the tables accompanying the press release. Each non-GAAP item in our forward-looking financial outlook that we will provide today has not been reconciled to the comparable GAAP outlook item because we cannot reasonably or reliably estimate future adjustments. Lastly, given the recent volatility in foreign currency exchange rates, we will be discussing certain results on both a reported and constant currency basis. During today's call we will indicate each time a constant currency metric is referenced. If we do not indicate the basis on which we are reporting a particular metric, you should assume we are referring to the reported figure. A reconciliation of revenue on a constant currency basis to our reported revenue is also provided in the tables accompanying our press release. And with that, I'll now turn the call over to Kevin.

[Kevin B. Thompson:]

Thanks, Dave. And thanks to everyone joining us for our first quarter 2015 earnings call. We are pleased to report what we believe is a good start to 2015. Total revenue on a reported basis was $116.8 million in the first quarter, reflecting year-over-year growth of 22%. However, given the dramatic strengthening of the U.S. dollar against the euro, British pound and the Australian dollar over the last 45 days of the quarter, which negatively impacted our reported results more than we anticipated, on a constant currency basis our total revenue was meaningfully higher at $121.4 million, reflecting year-over-year growth of 27% and a sequential acceleration in year-over-year growth from the fourth quarter of 2014. Our revenue growth in the first quarter was led by a 25% increase in recurring revenue to $74.4 million on a reported basis, and a 31% increase to $78.1 million on a constant currency basis. We also had a good quarter of license revenue growth with the license revenue increasing by 17% to $42.4 million in the first quarter on a reported basis, and increasing by 19% to $43.3 million on a constant currency basis. At a high level, as I look across the performance of our business in the first quarter, we delivered a solid start to the year. We had a number of highlights in the first quarter, several of which I will cover in my remarks, and I will also discuss a few areas where I believe our performance was not at the level I would have liked and what we are doing to drive stronger performance across these areas during the remainder of 2015. On a geographic basis, our U.S. federal business led the way with impressive growth in new business sales of 102% on a year-over-year basis. Our Americas business, which includes North America and LatAm also had a solid growth quarter, delivering 20% growth in new business sales. Our investments in U.S. federal over the last year have generated a solid return with accelerating growth rates and improved consistency. We believe that this market has the ability to be a continued source of meaningful growth in future periods. We believe the Americas, which is our largest geo, has tremendous growth potential in our core network management and systems management markets. Over the last several quarters, we have seen our new business growth rate in the Americas begin to accelerate, approaching and reaching 20%. We are focused on driving this part of our business to consistent performance of this level of growth in future periods. Our international business grew by 7% on a constant currency basis in the first quarter, while our growth expectations for international were somewhat muted going into the first quarter, given the economic and currency volatility in these markets. I believe that we could have performed at a higher level. However, that being said, we had a very strong month of year-over-year growth in March in international and we expect to build off this momentum in the second quarter and drive a higher level of international growth as we move through 2015. Turning to our performance product view of our first quarter results, on a global basis, we saw strong and improving new business sales growth with total core product and new subscription sales growth reaching 22% on a reported basis in the first quarter and 25% on a constant currency basis. On a reported basis, this is comprised of global core product license bookings growth of 21% and new subscription bookings growth of 31%. As most of you know, one of our key areas of focus has been on driving a minimum of 20% year-over-year sales growth in total core products and new subscription sales. And I'm pleased that we were able to exceed that target in the first quarter on both a reported and constant currency basis. Looking at our core product license bookings in more detail, sales of core network management products led the way, delivering growth of 23%. We are pleased with the accelerating growth we have been able to drive in license sales of our core network management products over the last several quarters and believe we have created a meaningful amount of forward momentum. While the year-over-year growth in license sales of our core system management products was also a solid 18%, we had more variability in performance across the major products in our core systems management product portfolio. SolarWinds Application Monitor, SolarWinds Virtualization Manager, and SolarWinds Database Performance Analyzer each had strong growth quarters, which ranged from 19% to 58% year-over-year growth. However, the very strong performance of these three key products was partially offset by a year-over-year decline in license sales dollars of our storage management products. However, before anyone gets too concerned about the performance of our storage management products, it is important to remember that on February 24 we released Version 1 of SolarWinds Storage Resource Monitor, also referred to as SRM, which runs on the Orion platform. SRM is intended to replace SolarWinds Storage Manager over time as the functionality and device support in SRM reaches parity with SolarWinds Storage Manager. In the initial launch quarter, we did not manage the transition from SolarWinds Storage Manager to SRM as well as we would have liked, resulting in a meaningful year-over-year decline in sales of SolarWinds Storage Manager, with the largest negative impact being on our international business. However, on a very positive note, we had a strong last five weeks of the quarter of license sales of SRM as our North American customers have quickly begun to purchase SRM, taking advantage of the powerful Orion alerting and reporting engine, which SRM now shares with all our core network management products and with SolarWinds SAN. As we look forward, we are very excited about the potential for SRM to be a high growth product for us through significant penetration of our core NetMan and core SysMan customer base and our ability to capture much higher levels of new customer demand for SRM than we have historically captured for SolarWinds Storage Manager. As most of you are aware, a small portion of our business is comprised of a set of eight small individual use products that we refer to as our Tools business. These products generally have ASPs of less than $2,500, and while they are not a strategic source of revenue or growth for us, they do comprise approximately 7% to 8% of our total license bookings in an average quarter. In the first quarter, we did not consistently capture demand for each of these products across the quarter, and as a result, license bookings from these products declined by 13% year-over-year. And once again, the disproportionate share of the impact was on our International business. As we look forward at the remainder of 2015, we have placed a little more focus on our Tools business to improve its performance. However, as it is not a strategic growth area for us, we have also reduced the future contribution from our Tools business in our outlook, which Jason will discuss in his remarks. Our customer retention rates for our network and systems management products have continued to be very strong. In fact, over the last four quarters, we have consistently been at or above the mid-90%s on a constant currency basis. We believe this speaks to the value that our products deliver to our customers and our ability to keep these products relevant through frequent and valuable product releases. Our MSP team delivered another quarter of positive results in a series of strong growth quarters, with new subscription business sales increasing by 30% on a reported basis and 39% on a constant currency basis in the first quarter. We also had a strong customer retention quarter in our MSP business, with dollar-based retention rates for subscription and maintenance customers that were at the highest levels we've seen in our history. As we've been discussing for the last 18 months, our strategy is to create a set of products that provide IT and DevOps pros the ability to manage the performance of all things IT. At a little deeper level of detail, we believe that it is critical to provide IT pros with the ability to monitor and manage IT infrastructure across a hybrid IT infrastructure world. We believe we are uniquely positioned to provide IT pros with a set of products that manage their on premise IT infrastructure, in addition to their SaaS and cloud-based IT infrastructure and all of the connection points in between. As you should recall, in the first quarter we announced the acquisition of Librato, which brought a cloud-based monitoring platform to SolarWinds that is allowing us to expand our infrastructure and application performance management capabilities from on premise to the cloud. In addition, our first quarter 2015 release of SolarWinds SAN included the release of our first agent-based monitoring capability, which allows IT pros to easily monitor applications in servers that reside behind a firewall, in a cloud or in other locations. Today we are announcing additional expansion in our capabilities to manage IT infrastructure deployed on premise and in private and public clouds, through the acquisition of Papertrail. Papertrail is an early stage profitable, fast-growing company which brings a cloud-based log analytics and management platform with SolarWinds that is already used by our 60,000 developers and IT pros. The Papertrail log management offering provides the ability to troubleshoot, correlate, and resolve IT infrastructure and application performance issues quickly by gathering real-time log data from distributed applications and infrastructure into one place, allowing for much faster and easier search, alerting, and reporting. Papertrail gives developers and IT pros hours of their day back by providing them the ability to proactively analyze problems and take action rather than manually reviewing massive amounts of log data. Papertrail has both a free and paid cloud-based log management offering. The free offering provides a very limited set of capabilities and is currently used by over 55,000 developers and IT pros. The paid subscription service, which is currently used by over 5,000 developers and IT pros, has pricing that starts at $7 per month and scales based on the volume of data that a customer wants to store, the number of searches that are performed, and the amount of history that customer needs to maintain on the performance of their infrastructure. Papertrail's log management offerings are also already integrated with Librato, where Papertrail leverages the Librato visualization engine to present the insights generated by its analysis of log data to its users who have that need. We believe that this existing integration will allow us to quickly bring a fully integrated solution to market during the second half of 2015, in addition to continuing to drive increases in usage of the stand-alone Papertrail log management offering and the Librato stand-alone cloud monitoring offering. We want to welcome the small team at the Papertrail to the SolarWinds family. We are excited to have you onboard to help us create the ability to manage all things IT. Jason will discuss the financial details of the Papertrail transaction in his remarks and will provide a view of how the acquisition will impact our financial results for the last three quarters of 2015. In fact, I will now turn the call over to Jason, who will discuss additional details regarding our first quarter performance and will provide our outlook for the second quarter of 2015 as well as an update of our full year 2015 outlook.

[Jason Ream:]

Thank you, Kevin, and good afternoon to everyone on the call. We are pleased to report Q1 revenue of $116.8 million, close to the middle of the range of outlooks that we provided on our last call. On a constant currency basis, total revenue for Q1 would have been $121.4 million, reflecting year-over-year revenue growth of 27%. The volatility in the currency markets had a larger impact on our reported revenues than we had estimated as a result of several factors, including a larger percentage of our license bookings coming in the last month of the quarter than we have traditionally seen and a more significant strengthening of the U.S. dollar against the euro, pound, and Australian dollar in the last 45 days of the quarter than we had really expected on our last call. Our results this quarter also highlight the strength of the financial model we have built at SolarWinds, particularly with respect to our recurring revenue. On a constant currency basis, maintenance and subscription revenue grew by 31% year-over-year in Q1, and now represents 64% of our total revenue. And while subscription revenue is growing faster, the larger stream of maintenance has all of the predictability of subscription with better retention rates than most SaaS models, in our view. In fact, we saw particularly strong renewal bookings this quarter across both maintenance and subscription customers. We continue to believe that our hybrid model, which has a combination of subscription as well as perpetual license, where we more heavily weight recurring maintenance revenue than most perpetual license software companies, is the best revenue model in software. The inherent leverage in our model was again apparent this quarter as we delivered non-GAAP operating margins of 41%, a point above our outlook for the quarter, despite finishing in the range of our revenue expectations. As we have said before, we have increased the level of investment in our business and in our hybrid IT management software strategy, but we have not changed the fundamental profitability of our model. With the official close yesterday, we acquired Papertrail for approximately $41 million of cash consideration. As Kevin mentioned earlier, Papertrail is a small but quickly growing SaaS and subscription based cloud log management business. The founders of Papertrail have built a strong product offering and run a very efficient business, generating solid operating profit despite the company's early stage. Of course, we intend to accelerate the investment in this business as well in the integration with other SolarWinds offerings, but we are excited about the great foundations that we have to build on with Papertrail. When we discuss our outlook for Q2 into the full year, I'll give you some more color on the contribution that we expect from Papertrail. Now I will walk through some of the key metrics that we have committed to provide each quarter. First, core commercial licensed transaction volumes grew by 10% in Q1 on a year-over-year basis. The average size for those core commercial license transactions was approximately $8,000, up from approximately $7,700 in Q1 of last year. I will note that our average transaction size, which is a worldwide number, was negatively impacted by the currency changes this quarter. Total revenue from network management products was $67 million. On a constant currency basis, the total revenue would have been $69 million, reflecting 19% growth from Q1 of last year. Total revenue from systems management products was $36 million. Again, on a constant currency basis, the total revenue would have been $37 million, reflecting year-over-year growth of 26%. Our MSP and cloud revenue was $14 million. On a constant currency basis, the total revenue from MSP and cloud would have been $15 million, reflecting over 80% growth from Q1 of last year. Most of the growth in this group of products came from our N-able business, but we also saw decent contributions from Pingdom. The revenue from our acquisition of Librato in the quarter was relatively insignificant but consistent with our expectations and with the comments we made on the last call. In the future, Papertrail revenue will be reported as part of this family of products. Sales by our installed base team grew year-over-year by 34% with strong performance in the Americas, which grew faster than the total, but we also had meaningful contributions from our international teams. Because of the success to date of our installed based sales efforts, the size of our customer base, and our strong portfolio of products, we intend to continue to invest in these teams. 26% of our revenue in Q1 came from our international subsidiaries, a decrease from 28% in Q1 of last year. This change was driven almost entirely by the strengthening of the U.S. dollar, which had the result of reducing our reported revenue outside of North America. And lastly, Kevin reported earlier that total core product and new subscription sales grew by 22% in the first quarter and by 25% on a constant currency basis. Within that total, core commercial new license and new subscription sales grew by 15% or 19% on a constant currency basis and core new license and subscription sales in U.S. federal grew by 125%. Turning to expenses, our total non-GAAP spend in this quarter was $68.8 million, an increase of approximately $3 million from last quarter and $14 million from Q1 of 2014. Our total spend in Q1 was slightly below what was implied by our outlook at 40% of operating margin level. Our overall spend in Q1 grew year-over-year by approximately 24%, a little bit faster than revenue but still driving an increase of over $7 million or 18% growth in non-GAAP operating profit. I do want to point out that the growth in spend that is not specifically dedicated to our MSP and cloud businesses was several points lower than the overall spend growth. Consistent with our earlier expectations and comments, we believe that the investment as a percent of revenue in that part of the business has now reached a more steady state level and that leverage is once again coming through at a higher rate. On the balance sheet, we ended the quarter with $251 million of cash and investments, with approximately 61% of that balance held in the U.S. Total cash and investments decreased slightly from $268 million at the end of December, primarily because of the cash expense related to the acquisition of Librato. The reported dollar cash balances of our international subsidiaries, which are primarily held in euros, were also impacted by the deterioration in the euro, the USD exchange rate during the quarter, with the effect of reducing our reported cash balance by approximately $9 million. Lastly, our operating cash flow was somewhat impacted by a $4 million use of cash in accounts receivable. The rise in accounts receivable was due to the relatively back-ended finish to the quarter, which I mentioned earlier in my remarks. I want to point out that we have not seen any change in collections behavior and believe that the rise in AR is simply a result of a higher percentage of bookings coming at the end of the quarter. Turning to our financial outlook for the second quarter and full year of 2015, I'm going to provide a few pieces of background information before I give the full details on our outlook. First, as we are all aware, most foreign currencies have continued to weaken against the dollar, which has a negative effect on our revenue, as we have explained before. On our last call, we spent a fair amount of time talking about the effect of currency on our maintenance and subscription revenue, but as the euro, pound and other currencies have continued to fall against the dollar, FX is increasingly affecting our expectations for new business sales and license revenue. We are adjusted our outlook for the last three quarters to reflect the impact of the weakening in these currencies. Second, with the acquisition that we announced today, we are adding Papertrail's revenue to our expectations for the remainder of the year. As Kevin has described, Papertrail is a small company with a five-person team and is not yet generating a large amount of revenue. The revenue is entirely subscription based and most of the customers are on monthly contracts. So while we won't see much revenue contribution in Q2, we expect revenue to ramp back to and beyond pre-acquisition levels by Q3. Our current expectation is for Papertrail to contribute approximately $2.25 million to $2.75 million to our subscription revenue line during 2015. Third, given the decline that we saw in new sales of our Tools products in Q1, as Kevin described, we have decided to moderate our expectations for this part of our business and our outlook for the remainder of the year. Now for the details. For the second quarter, we currently expect our revenue to be approximately $127 million to $130 million on a constant currency basis, reflecting growth of 25% to 28% over Q2 of last year. In our outlook for reported revenue, we are currently assuming a euro to USD exchange rate of 1.07, as opposed to the 1.37 we experienced in Q2 of last year. Therefore on a reported basis, we expect our Q2 revenue to be in the range of $120.6 million to $123.8 million, reflecting 19% to 22% year-over-year growth. I'm going to go quickly back through those numbers one more time. Using the exchange rates from Q2 of 2014, or 1.37, our expectations for revenue in Q2 of 2015 would be $127 million to $130 million or 25% to 28% year-over-year growth. Using our current exchange rate assumption of 1.07, our outlook for revenue in Q2 is $120.6 million to $123.8 million or 19% to 22% year-over-year growth. As we did last quarter, we are assuming an exchange rate that is more or less the current spot rate but given the volatility in the euro to USD exchange rate, we will again provide you with the math to adjust for any future changes in the rate. I will say, however, this math is just an approximation as specific currency mix, timing of bookings, and a number of other factors will add to the actual revenue impact of currency changes. However, at this time we estimate that a $0.01 change in the average euro to U.S. dollar exchange rate for Q2 would change our total revenue expectation for the quarter by about $200,000. For Q2, we expect to generate non-GAAP operating margins of approximately 40% based on the assumption that we continue to ramp our investment in the business at a pace similar to that of Q1. We also continue to aggressively invest in the parts of our business that will help to complete our hybrid IT management strategy, including N-able, Pingdom, Librato, and now Papertrail. Lastly, for the second quarter of 2015 we expect our non-GAAP tax rate to be approximately 26% to 27% and to have approximately 77.75 million weighted average diluted shares outstanding, driving non-GAAP earnings per share of $0.45 to $0.47. For the full year of 2015, we currently expect our revenues to be approximately $530 million to $544 million on a constant currency basis, reflecting growth of 24% to 27% over 2014. Again, in our outlook for reported revenue, we are currently assuming an average euro/U.S. dollar exchange rate of 1.07 for the remaining three quarters of the year, compared to the 1.33 average we experienced in 2014. Therefore, on a reported basis, we expect our 2015 revenue to be in the range of $512 million to $527 million, reflecting 19% to 23% year-over-year growth. Again, I'll go quickly back through those numbers one more time. Using the exchange rate average of 2014, or 1.33, our expectations for revenue in 2015 would be $530 million to $544 million or 24% to 27% year-over-year growth. Using our current exchange rate assumption of 1.07, our outlook for revenue in 2015 is $512 million to $527 million or 19% to 23% year-over-year growth. Like the math that we provided for our Q2 outlook, we estimate that a $0.01 move up or down from our current assumption of 1.07 for the average euro to U.S. dollar exchange rate for the remainder of 2015 would increase or decrease our expectations for total revenue by approximately $600,000. It is important to note that there are a number of variables that will impact this estimate, including mix and timing of foreign currency sales and renewals. As you are building your models for the year, think of subscription revenue as the fastest growing component of our revenue, and although it would be difficult to sustain the 130% plus year-over-year growth rate that we've seen for the past four quarters, we do expect for our subscription revenue to show a meaningful dollar growth quarter-over-quarter in 2015. As far as license and maintenance revenue, I would suggest that you think of those two components of revenue growing at fairly similar year-over-year growth rates in 2015. From a profitability perspective, our outlook for non-GAAP operating margin in 2015 remains at 40% to 41%, consistent with our prior outlook. We expect our non-GAAP tax rate for the year to approximate 26% to 27% and to have approximately 78.25 million weighted average diluted shares outstanding, driving non-GAAP earnings per share of $1.92 to $2.04. Again, $1.92 to $2.04. With that, I will turn it back to Kevin.

[Kevin B. Thompson:]

Thanks, Jason. As you've heard in our remarks, we feel we have started 2015 on solid footing, delivering constant currency total revenue growth of 27% in the first quarter against a strong growth compare from the first quarter of 2014. And we have also laid the foundation for a good year of demand capture through the first quarter release of the AppStack dashboard, new versions of SolarWinds NPM and SAM, and the addition of Librato and Papertrail. These new product releases and new additions to our product portfolio will allow us to speak to an expanding set of problems on our websites in digital media, in IT community sites, and in all the other places on the web where IT pros, developers, and DevOp pros congregate. We believe we are positioned to deliver a solid and consistent year of growth in 2015. This belief is reflected in our revenue outlook, which Jason provided in his remarks for constant currency growth of 25% to 28% for the second quarter and 24% to 27% for the full year. We remain focused on driving higher levels of growth in our core network management and core systems management market. Opportunities are being created for us in several ways. First, in our view, our larger competitors' focus on these markets has continued to decline as they search for new markets with easier growth for them. And second, the addition of a wide variant of cloud-based infrastructures is occurring at a rapid pace. And in many of these cloud infrastructure environments, our existing products are not only relevant, we believe the combination of our relatively small footprint, multiple deployment options and an affordable price gives us meaningful, competitive advantage to have a SolarWinds product end up as the cloud-based infrastructure management product of choice. Based on the opportunities we see in front of us, we have plans to further expand the set of problems that our products are able to solve for IT pros in the core network and systems management market over the coming quarters. So stay tuned for additional announcements. As you heard in our earlier remarks, our MSP business, which provides products to MSPs, which in turn deliver a broad set of IT infrastructure management services to a large number of small businesses that have adopted a light IT approach to building their IT infrastructure, has continued to perform at a high level. It is our belief, based on the market data points we see and our conversations with our customers, that growth in this portion of the IT management market has accelerated. We're going to increase our focus and investment in this opportunity over the coming quarters. In fact, during the second quarter, we're planning to release a great new version of our MSP product, N-central 10.0, which we believe is the most significant release of our MSP offering that we have had in a number of years. We'll add two exciting new capabilities

[Operator:]

Thank you. And our first question will come from John DiFucci with Jefferies.

[John DiFucci:]

Thank you. Jason, you mentioned there was a larger number of license bookings in the last month of the quarter. Why do you think that's the case? I mean, your model tends to be more linear than a lot of other software models. Was it something you did or was there some other environmental effect?

[Kevin B. Thompson:]

Hey, John, this is Kevin. I'll take that one.

[John DiFucci:]

Okay.

[Kevin B. Thompson:]

So it's definitely not something we did, because I don't really enjoy waiting late in the quarter when I can avoid it. I just think that the environment, at least in the middle of the quarter, was a little slower than we would have liked. So February was not a super strong month for us, and as I indicated in my comments, March was very strong across the business. So I think it was definitely environmental, definitely not something that we did, and we would expect future quarters to be more linear. This was definitely one of the ones that was the least linear we've had in a while.

[John DiFucci:]

And that relative weakness in February, you said that was mostly international?

[Kevin B. Thompson:]

So international definitely had a tougher middle month than North America, but North America was also a little bit slower in February. So both North America and international had very strong months in March with very high growth rates, much higher than our average for the quarter. So it feels like we built momentum through the quarter and we had a lot of momentum exiting March, and hopefully that momentum will continue.

[John DiFucci:]

Thanks, Kevin. If I might, just one more. Sort of a higher level question. Coming into this quarter, when we just sort of took a look at the numbers, it looks like the new business expectations that you had on a constant currency basis were for acceleration this year versus last year, and last year you were off a relatively easy comp. This year it's obviously a more difficult comp. And you've changed it a little bit because of the tools here and there's a little give and take here with the Papertrail acquisition, which is small but and I assume just a small modest decline or reduction in your expectations for the tools. But I guess, what do you think, what's going to drive that acceleration? You sound really optimistic against the competition, but is there something else that, other than the environment, is there something you're doing? I know we talked a lot about digital marketing and your efforts there. Is that something that's starting to kick in or that you believe will?

[Kevin B. Thompson:]

Yeah. So look, I think it's a number of things. First for me, when you look at our network management business, over the last six quarters we have I think done a really good job of driving an accelerating level of growth in that business. I think there was a lot of questions a year and a half ago about whether there was still a growth opportunity in network management, was the market too stale, was it old, was there no ability to grow. I think we've proven that we can grow and we can grow very quickly in that market. And I feel like we can continue to drive higher levels of growth in network management, and we're proving that every single quarter. So that's part of it. I think we also have done a really nice job of taking our database performance management product and making it work inside the SolarWinds model. Our marketing team has done a really good job of creating a digital marketing strategy for that product line, which didn't exist before the acquisition. We've already lapped that acquisition, so even with that product being a part of our company for well over a year now, we're still seeing very high levels of growth. And that's a combination of marketing execution and sales execution and the fact that there's a really big market opportunity to manage the performance of databases, because if you can't manage the performance of the database, you can't guarantee the performance of the application. And then also, we talk a lot about we've invested heavily in our digital demand generation engine. And I think that engine, while not running perfectly yet and maybe I'll never say it's running perfectly, but right now I know we can do better than we are. We're still doing much, much better than we were doing 24 months ago or 12 months ago. So it's no one factor, it's a number of factors I'm looking at that give us the confidence that we grow faster in 2015 than we did in 2014, even though we are going up against a pretty robust compare.

[John DiFucci:]

Great. Thank you, Kevin.

[Kevin B. Thompson:]

Thanks, John.

[Operator:]

Our next question will come from Gregg Moskowitz with Cowen & Company.

[Gregg S. Moskowitz:]

Okay. Thank you very much. I guess first off, just a clarification on Papertrail. Kevin, how is this architected? Is it deployed as a hybrid solution? Or is all the data regardless of where it resides being monitored in SaaS?

[Kevin B. Thompson:]

So Papertrail is a native cloud-based application. So all of the data, the log data, that is captured is stored and managed from the cloud. However, it can manage both cloud-based infrastructures, it also can do log management for an on premise-based infrastructure. I will tell you, though that the predominant portion of Papertrail's customers today are developers, who are using Papertrail to look at the performance of applications that they're building, so it brings it a bit of a new community to us and allows us to appeal to both DevOps pros as well as IT pros. And so that's the way you ought to think about Papertrail right now.

[Gregg S. Moskowitz:]

Okay. That's helpful. And then just following this acquisition, and it sounds like the integration of a lot of it already was done, frankly, as a standalone company, but are there any additional product holes when it comes to cloud, from your perspective?

[Kevin B. Thompson:]

You know, I think there are still things that we don't do yet. I mentioned in my remarks, there's a couple things we're working on. So we're working on very early stages of development of an offering that'll deepen our application management capabilities. We're at very early stages in working on an application that will give us the ability to look at the performance of the path between the application and the user, and that's both the on premise path as well as the path between on premise and the cloud, which we think is a critical part of what an IT pro or DevOp pro needs to be able to see to know where the application performance problem is occurring. And so there are still things that we need to do to fill out our picture of the strategy that we have. If you remember the diagram that we presented back at Analyst Day in November, there were four or five different capabilities we believe we need to add. We added a couple of those through acquisitions. And we got a couple of those we're working on building. So I think we have now what we believe is a pretty unique set of capabilities between Web performance monitoring, cloud infrastructure monitoring and log management, which is Pingdom, Librato, and Papertrail. But there're a few things we would expect to add in the future in addition to that, in addition to even the ones I've talked about. We haven't prioritized those yet, which is why I'm not going to simply say what they are. But there are quite still a couple areas where we need to add technology. And we may acquire it; we may build it. We'll just have to wait and see.

[Gregg S. Moskowitz:]

Okay. Thanks. And just one last one for Jason, just based on your guidance, what percentage of license bookings are you expecting your tools to comprise in 2015 as compared with the 7% to 8% historical contribution?

[Jason Ream:]

So, Gregg, we would expect those to be a lower percentage of the overall total because we definitely are not expecting them to grow as fast, nor are we investing in them to cause them to grow as fast as the rest of the business.

[Gregg S. Moskowitz:]

Can you say, is that just sort of modestly lower? Or is it fairly meaningful as a percentage?

[Jason Ream:]

Yeah. I would say that's modestly lower.

[Gregg S. Moskowitz:]

Great. Thank you.

[Operator:]

Our next question will come from Kirk Materne with Evercore ISI.

[S. Kirk Materne:]

Thanks very much, guys. Kevin, as you expand the cloud portfolio, I realize there's probably not any major changes to the go-to-market model. I know you guys are very deliberate in sticking to that model. But can you just talk a little bit about the skill set that may be required to sell some of the cloud products versus some of the traditional on premise or license products? Is there any real difference there? Or are these products that you can really wrap right into your preexisting go-to-market model, and really not have to make too many changes either to the demand gen side or actually to the closing of the loop on the transaction side?

[Kevin B. Thompson:]

Yeah. I think the great thing about our model, Kirk, is it was cloud-ready, meaning we operate on a digital demand-based model. We use the Web to capture demand. We use the Web to reach potential customers. We use the Web to reach our existing customers. And we have the ability to close an incredibly high volume of transactions through our inside sales-based model, as well as make it frictionless. So in many cases, we're not talking to customers very long before they buy. In some cases, they're buying without talking to us. So it really doesn't require a meaningful change in our go-to-market model. You know there are administrative things we'll have to deal with, which is things like sales compensation and those kinds of things. The plans will look slightly different when you have a subscription-based plan versus a license-based plan. But the mechanics of what we do from how we manage our sales teams to how we market to how we use the Web, those things don't need to change.

[S. Kirk Materne:]

Great. And then just a quick follow-up on the NPM business. I mean you guys mentioned you know about six quarters ago now that it takes some time to kind of get the flywheel going. It seems like that flywheel is now spinning. I'm sure some of the callers, you're going to get some questions whether or not this is just sort of a one-time catch-up. I guess, what gives you confidence that once you, now that the business seems to have some momentum, this isn't just something that sort of catches up for a quarter or two and then sort of goes back to where you were? I guess what gives you confidence, either in the pipeline levels, just the download activity? Just give us some sense on why we should feel pretty good that the NPM pick-up is not just sort of a one or two quarter phenomenon. Thanks.

[Kevin B. Thompson:]

Yeah. So look, I think if you look at the performance over the last six quarters, and it may be the best way to look at it, what you've seen is a consistent improvement in the levels of core product new license sales of our NetMan products. So it hasn't been a one quarter or two quarter phenomenon, it's been building over six quarters. This is not something we expected to turn around overnight. As you indicated, I said six quarters ago, we're going to get better a little bit at a time and then we're going to reach levels that we feel we should be at, and we're not all the way to that point yet. I think we can still make this business roll a little bit more quickly but the great thing is, look if it stays above 20%, to be frank, there's a lot people probably on this call and other investors who didn't think we could get it back to that level and we felt confident we could; we have. And so we still feel good about our ability to continue to drive higher levels of growth. We're not done bringing new technology to market and that space. I indicated in my remarks that there're still things we think we can do and new features we can add, new products we can bring to market, and we're working on some of those things and so as we get a little closer to them we'll talk about it. But there's still opportunity in that market and it's a big market. And one that is actually still growing, right? So even if you use an IDC data point that's growing at 4% to 5% and we intend to continue to capture a lot more than our fair share of that growth, which we've been doing. As well as, there's a lot of old technology deployed managing networks around the world and we have not yet displaced even close to all of that technology. And over time, we will. And so those are the things that give me confidence that we can continue to drive growth in this part of our business.

[S. Kirk Materne:]

Super. Thanks, Kevin.

[Kevin B. Thompson:]

Thank you.

[Operator:]

Our next question will come from Steve Ashley with Robert W. Baird.

[Steve M. Ashley:]

Hey. Great. I'd just like to go back to the storage products that you talked about on the call. Just the outlook for Storage Manager and I understand that SRM is coming on the scene and it's ramping up very nicely now. How should we think about the dollar sales levels of Storage Manager going forward?

[Kevin B. Thompson:]

Yeah. So I think, Steve, the best way to think about it is to think about the dollar sales level of our combined storage offerings. So really STM plus SRM is what I'm focused on. So I think what we should expect in terms of total storage, we think total storage will ultimately be a growth driver for us. It'll take a few quarters as we work through the transition because now we're still selling STM, we're selling SRM. SRM does not have all the features and definitely does not have all the device support of STM, so there're storage boxes that SRM does not manage yet that STM does. So eventually SRM will fully replace STM, but that's going to take a decent amount of time. But I think you should expect the combined sales of SRM and STM, as we look out over the rest of the year and into next year, that those will contribute to growth. And then ultimately, I think that the SRM will be a high growth product for us, and total storage will be a high growth product for us. There's a bit of a transition we'll walk through. SRM is priced a good bit more affordably, if you to look at our website, than STM. And so even if we sell the same volume of SRM or more volume of SRM than STM, we still have a little bit of negative impact on the dollar side. But I do think we can quickly get the combined storage sales to where they are flat year-over-year and then have them begin to drive up. SRM is a really good product. It's much easier to use. It's going to appeal not only to guys that are managing storage boxes, which is who STM appealed to, but it's also going to appeal to the network guy and the server guy who just wants to know what's going on in the storage environment. And because it rides on Orion just like NPM and SAM, we can show them in one dashboard what's going on in both environments. So as you can tell, I'm pretty excited about it, so I think over time you should expect it to be a meaningful growth driver for us. This year will be a bit of a transition year. And we had that built into our outlook. It's been a little more of a transition in Q2 than I anticipated, but I feel good – or Q1, sorry than I anticipated, but I feel good about Q2 through Q4.

[Steve M. Ashley:]

Terrific. And then I'd just like to ask about the international business, which was up maybe I think 7% constant currency here in the first quarter. What is your outlook in – have you changed your outlook for the international business?

[Kevin B. Thompson:]

You know. Really other than tools, which had an impact on both a small impact on international, a small impact on North America, because tools are not a very big part of the business. We actually expect international growth to pick up as we move through the rest of the year as it relates to that. We had relatively muted expectations walking into the quarter, a lot of noise in the international markets. So we had a higher view of growth in other places. And so really other than the small change in tools, our outlook remains effectively the same, other than tools and currency.

[Steve M. Ashley:]

Perfect. Thank you.

[Operator:]

Our next question is Keith Weiss – is from Morgan Stanley.

[Sanjit K. Singh:]

Hi. This is Sanjit in for Keith. Just a couple of questions maybe, Jason, on the operating margin side. I just want to understand how much of a natural hedge is the international from an expense standpoint, on the overall currency impact?

[Jason Ream:]

So there is a natural hedge there. It's not much and when you think about the balance of our revenue versus our expenses, obviously we have much greater impact on the revenue side than we do on the expense side. The bulk of our expenses are in the U.S. and in other places that are not euro, but we obviously have a lot of euro expense and we have some other currency expense as well. So we do get some benefit from the currency change, but not nearly to the extent of the impact on our revenue.

[Sanjit K. Singh:]

Got it. And if I look at the maintenance line, we're looking at decelerating growth for several quarters now. And you guys have addressed this before in terms of you're sort of still seeing some of the impacts from the slowdown of 2013. When do you see that – the deceleration in the maintenance line start to flatten out?

[Jason Ream:]

So great question, and in my script I talked about thinking about the individual components. While we don't guide to individual components of revenue for the year, as you think about them, you should think about the growth rates for license and maintenance revenue being similar to one another. They were similar to one another this quarter, and I think you should expect for that to be the case going forward for the rest of this year. Obviously maintenance will always lag whatever direction the license growth is going, so if we accelerate license growth from here, maintenance growth will start to pick up as well. And that's just math and how license and maintenance work, but I think that's the way you should think about it.

[Sanjit K. Singh:]

Perfect. And just one quick follow up on the tools business and the storage business. Why would that mostly impact international customers? Is there a different product purchasing mix in your international base versus your U.S. base? Or is that a reflection of the big federal government quarter that you had at the end of the year?

[Kevin B. Thompson:]

No, it's really two different things. So on the storage side, it is because whenever we release a new product, we're going see better performance earlier in North America, and that happens with every new product we release. So we had better SRM performance in North America in the first quarter than we did in international. I expect SRM performance to be much better in international in the second quarter. So it's simply just a factor that we have larger team here in North America, we have a larger customer base in North America, and our North American customers just respond a little more quickly to new releases from us than our international customers do. And that's been the trend literally ever since I've been here. So that's on the storage side. On the tool side, it's actually because relatively speaking, the tools business is larger as a percentage of total in Europe, in particular, than it is in North America. And that is just because we have a couple of countries where we just had strong tools business, historically speaking, and so that decline had a little larger percentage impact on international than it did North America.

[Sanjit K. Singh:]

Got it. Thank you so much.

[Kevin B. Thompson:]

Thank you.

[Operator:]

And now we'll go to Karl Keirstead with Deutsche Bank.

[Karl E. Keirstead:]

Thanks. Jason, two questions for you, both on the 2015 guide. Your new constant currency guide is 24% to 27%. I just want to make sure I understand this correctly. If I go back to your last earnings call, I think you were calling for 22% to 26% constant currency growth in 2015, so that was an upward guidance revision. I just want to make sure I'm thinking about that the right way. And then secondly, do you still feel comfortable with your NetMan revenue growth outlook of 14% to 17% and your SysMan outlook of 23% to 30% for 2015? Thank you.

[Kevin B. Thompson:]

Yeah. So to your first question, yes, you're right with the numbers that you read off. And then to your second question, we really didn't give an outlook for the rest of the year for core NetMan and core SysMan because we typically don't do that. But what I would say is that we feel good about our ability – and in responding to your first question – that we're going to continue to see strong performance in our NetMan business. And we think that growth rate can definitely stay where it is and we can drive it higher over time. And we think our SysMan business can absolutely grow faster than it did in the first quarter. And if you're referring back to what we shared at Analyst Day, yes, our view has not changed in terms of the different components of our business growth compared to what we said back at Analyst Day.

[Karl E. Keirstead:]

Yeah. Perfect. That's what I was looking for. Thank you.

[Kevin B. Thompson:]

Thank you.

[Operator:]

Our next question comes from Daniel Ives with FBR Capital Markets.

[Daniel H. Ives:]

Thanks, Karl, for asking the question that everyone was also asking, at least wondering. Kevin, could you talk about in terms of acquisition, obviously you made a few acquisitions here recently and obviously you're in the digestion period with some other ones, but you continue to add more M&A. Just talk about that sort of balance in terms of doing too many acquisitions versus, you know, needs versus wants? Maybe you could just walk through your philosophy there.

[Kevin B. Thompson:]

Yeah. So, look, I think – we made – if you look at it, we made three acquisitions since late last year

[Daniel H. Ives:]

Good answer; good quarter. Thanks.

[Kevin B. Thompson:]

Thank you.

[Operator:]

Now we'll go to Rob Owens with Pacific Crest.

[Rob Owens:]

Great. Thank you very much. So after the slowdown that you guys saw in February, were there any actions taken or tweaks I guess to increase demand gen? Or did it come back more so from an organic perspective?

[Kevin B. Thompson:]

So at first what I'd say is look, if there's ever a slowdown in anything, I'm going to make sure we take an action. We're not the kind of team that sits around and hopes something goes well. So, one, I think we're constantly looking at the analytics of our business and trying to understand what's going on and watching trends and try to project them forward. So without a doubt, when February did not finish quite as strong as we'd hoped and we looked forward to March, we clearly looked at pipelines and said where are we? We felt pretty good about where we were, but at the same time, we accelerated is probably the wrong word but I think we focused even more intensely on the demand generation efforts that we had going on in the month of March. As you know, we have a 30 to 45 day average sales cycle, but we can close deals in a lot shorter period of time than that when we need to. So whenever we have anything that goes differently than we anticipate, we're going to look at it. As soon as we understand it, we're going to take some level of action. So in March, one

[Rob Owens:]

Great. Thanks. And then in Q1, a $0.01 move relative to the euro I think you disclosed earlier was about $135,000. Now you're talking about $200,000 relative to revenue. Just can you help me understand where the delta might be there?

[Jason Ream:]

Yeah. Sure, Rob. As I mentioned in my script this time, that math is really an approximation and it depends on a lot of different factors, including the timing of the bookings, the mix, how those trend over the quarter. What we learned in Q1 is that there are some more factors that we needed to include and so we've taken some more of those into account. But also Q1 – Q2 just has a different pattern than Q1.

[Rob Owens:]

And was 1.07 roughly the average rate you're thinking about for Q1, given that's your forward guide?

[Jason Ream:]

For Q2 for our forward guide, yes.

[Rob Owens:]

But that was the one you experienced in Q1 as well? Or is Q2 down a little bit from there?

[Jason Ream:]

No. We're expecting Q2 to be down from Q1. Q1 was an average of about 1.12.

[Rob Owens:]

Great. Thank you.

[Jason Ream:]

Thank you.

[Operator:]

And now we'll go to Kevin Buttigieg with MKM Partners.

[Kevin Michael Buttigieg:]

Thank you. Just to delve into a little bit on your success in the U.S. federal markets there. I'm just wondering how broad the product uptake is. I imagine it's largely in the network management space, but I'm just wondering what success you've seen outside there. And what is it in terms of – I imagine the average transaction size there has got to be larger, but wondering if you've gotten big large deal contribution there? And I know in the past, you've had the federal government be as much as 10% of your revenues, and just wondering with the success that you've had there, if that's a possibility to get back to those levels again, either with or without large transactions?

[Kevin B. Thompson:]

So long question. I'll try to make sure I answer kind of all the parts of it. So as we look at our federal business, it's definitely one of the areas where we have made investments over the last three or four quarters. We saw an opportunity a year ago to start to drive meaningful growth in U.S. federal. I think we've got a set of products, and we've talked about this before, that really meet the needs of a federal user. Our products are very easy to use in distributed environments. Our products are very easy to implement and very easy to manage once they're implemented. They tell the user what to care about. And as you think about the U.S. federal government, particularly on the DOD side, you got a bunch of 18, 19, 20-year-old kids who are not network engineers, they're not IT pros, they've been through eight, 10, 12 weeks, maybe six months of training and now they're in the field managing the performance of a relatively complicated mobile IT infrastructure. And so our products are really uniquely suited to meet that need, and so we've invested in our federal team, we've grown that team, we've invested in federal marketing, we are marketing broadly across both civilian agencies as well as the Department of Defense. We've leveraged the wins we've had historically in federal. We've gotten baked into a number of projects, as we've talked about, and those projects will buy sporadically, based on kind of when they have need, when people are being deployed in certain locations. We are driving higher levels of demand, higher levels of pipeline than we have historically in federal and expect federal to be a growth driver for us. Now will it always grow at the rate of commercial? Likely not. I think there'll be quarters where it grows much more quickly. There'll be quarters where it grows a little bit more slowly. It's not as big as the commercial market obviously in total, but it is a very big market. The other thing we've done is we've begun to take the success we've had in U.S. federal and expand it to other national governments around the word. We've never put a focus on any national governments other than the U.S., and so we now have a small team actually led by the guy who runs U.S. federal for us, who is now beginning to focus on replicating the success we've had in U.S. federal in other national governments around the world. And right now we're focused on more Western-style governments, NATO, those kind of places where we believe behavior and buying patterns and even buying rules will be similar, so we can leverage what we've learned and leverage what we do well. So I think the – we have been growing that business, and doing about the same dollar amount every year of larger transactions. And so, most of the growth has been driven by volume. So if you go back and – and I can't remember all these numbers because there are too many numbers to remember. But if you went back and listened to a number of earnings calls, you will hear us talk about – a lot of you, in a number of those calls, about meaningful growth in federal transaction volume. And so, most of the growth over the last year and a half has been driven by an increase in transaction volume, and we would expect to continue to have strong core product transaction volumes. You're right about it being – NetMan being the leading product in that space. We sell a lot of our systems management products into federal also, but network management is where we have more customers where we're baked into them – because we've been selling NetMan longer obviously – where we're baked into more projects, and where we have more just expansion of existing deployments going on. And so, NetMan tends to be the products that are leading the way in fed, but we are having success with really all of our products in fed, even some of the newer products. We'll see on some of the subscription products. I don't have a real expectation yet of how that will go, but we'll see how that goes. So, good market for us, one that we've I think been rational about in terms of how we invested in it and what we expect from it. The one that I've consistently said I think can be a growth opportunity for us, and one where I believe we have a competitive advantage.

[Kevin Michael Buttigieg:]

Thank you very much.

[Kevin B. Thompson:]

Thank you.

[Operator:]

Our next question will come from Greg McDowell from JMP Securities.

[Greg R. McDowell:]

Great. Thank you. Just one real quick one for you, Jason. You had mentioned that spend in Q1 was slightly below your outlook, and I was just wondering if you had changed your spending plan as you saw currency movements change. And really the second part of that question is, is you made a comment around the growth in spend not specifically dedicated to the MSP business. So I was just wondering if you could clarify what you meant by that, and sort of the spend growth profile of the MSP business versus the rest of the business. Thanks.

[Jason Ream:]

Sure. So look, Greg, we always adjust our spending as we go along. We make judgment calls on a weekly, monthly, sometimes daily, but more often monthly and weekly basis, depending on what opportunities we see come up and what decisions and what priorities that Kevin and I and some of the rest of the team feel is right at that time. So long answer to say, yes, we did change some things. But when you go back and look at what was implied by our outlook at the 40% operating margin level, we didn't quite spend to that level. And to the second part of your question, what I tried to say was, and I tried to say it in a – maybe too complicated a way, was the part of our spend that is not dedicated to the cloud or the MSP business. So essentially, the spend on what is specifically the perpetual license business, that part of our spending has – did not grow as fast as total revenue did in the quarter on a year-over-year basis. That has been the case or very close to the case for some time now. And as we've been saying, that's at a more steady state level. We're seeing leverage come through there. That's after the period starting from the middle of 2013, where we ramped our investment levels, and so where we were growing expense faster than revenue at that point. In the Perpetual License portion of the business, we're once again generating good operating profit growth there, and in some cases, margin leverage.

[Greg R. McDowell:]

That's helpful. Thank you.

[Dave Hafner:]

Melissa, we have time for two more questions.

[Operator:]

Okay. The first question will come from Scott Zeller from Needham & Company.

[Scott Zeller:]

Yes. Hi. Can you hear me okay?

[Kevin B. Thompson:]

Yes.

[Scott Zeller:]

Okay. Wanted to ask about the adjustment to calendar 2015 guidance. I'm just trying to look at the puts and takes there. So at the midpoint, it looks like it's being brought down roughly $2 million-ish. How much of that, when you look at the FX impact, and then the impact from tools, versus the lift and benefit you get from Papertrail? How would we size out each of those puts and takes to get to a, basically a trim of roughly $2 million?

[Jason Ream:]

Yes. So Scott, I'm not going to give exact numbers for each of those, but you've listed a number of them. First, obviously, was the fact that our Q1 revenue was below the high end of our outlook range and above the low end of our outlook range, so obviously that affects what our full-year outlook will be. Tools has an impact, foreign currency has an impact and Papertrail has an impact. We talked about the impact of Papertrail, $2.25 million to $2.75 million is what's built into our full-year outlook. Very little of that in Q2 because of the timing and because it's a subscription model, and more in the back half of the year. The other impact – I'm not going to give the exact details, but you can look at the end result and get pretty close to a good answer there.

[Scott Zeller:]

Okay. And then if I could follow up and ask, Kevin, when you look at your historical transaction with TriGeo and that acquisition, versus Papertrail, versus Pingdom, could you just, at a high level, describe what looks like what here? And how they're related? And how they're different?

[Kevin B. Thompson:]

Yes. It's a good question. So look, Papertrail, and what we call, Log & Event Manager, which came from TriGeo, both are log management products, but have very different use cases. So what Papertrail is doing is capturing a bunch of log data, correlating, analyzing and telling you what's going on with an application or a component of your infrastructure. And what Log & Event Manager really does, it is a purpose-built product that solves a couple of problems. So one, it does a great job of capturing and presenting log data to help with areas where you have compliance requirements and you have to prove you've fulfilled those compliance requirements. It also has a very good security information and management product and is packaged to do that out of the box. And then it also does some really light-weight, if you will, kind of IT operations management, giving you some level of visibility to where you may have some issues in your infrastructure. What Papertrail does is capture all of that log data and allow you to sift through it in a – free form is maybe the wrong word, but you're able to sift through that log data and analyze and correlate it any way you want. And it is able to look at a broader cross-section of your infrastructure. Really aimed at solving very different problems. If you want LEM, you'll continue to buy LEM. You're not going to be trying to make a decision between the two. Pingdom is just web performance management, so it's not really looking at logs at all. It's looking at how is your website performing, how are pages on your website are performing? How are transactions on your website performing, and at what speed? But when you bring all that together, it actually gives you, with Librato, gives you a pretty interesting way to look at performance of a website or a web app or a cloud-based app, and figure out what's causing the problem, not just that you have a problem.

[Scott Zeller:]

Okay. Thank you very much.

[Jason Ream:]

Thank you.

[Operator:]

And our final question today will come from Tim Klasell with Northland Securities.

[Tim E. Klasell:]

Yeah. Good afternoon. Thank you for taking my questions. Just a quick follow-up on Papertrail. Should we think of that as somewhat similar to Sumo Logic? Or am I going down the wrong path there?

[Kevin B. Thompson:]

No. I think you're right. I mean Sumo Logic and Papertrail do some of the same things. I think Sumo Logic is more focused on being a competitor to Splunk right now. And they're kind of higher end on the analytics side. And think about Papertrail as capturing all the same data, but really being designed right now to be a tool that a developer or an IT guy can use to quickly look at the performance of an application, even while they're building it or after they put it into production, and figure out what's going on with the performance of that app. So not as much as kind of BI [business intelligence] capability as what a Sumo has or what Splunk has at least in their full product.

[Tim E. Klasell:]

Okay. Good. And then a follow-on to an earlier question. How have the maintenance renewals held up? Have they been trending as you would expect? Or maybe you can give us a little bit of color on that?

[Kevin B. Thompson:]

Yeah. So it's going well. Definitely trending right where I'd expect, both in the perpetual license business as well as in our MSP subscription business, where in our MSP business we've seen retention rates rise. And we've actually been seeing a little bit of a rise in our retention rate in our professional license business. Do I think they're as high as they could ever get? The team knows I don't. So that's just for my team members that are listening. We still got room to run and so I think we can still take them up a little bit, but they are at their historically high levels and I think still have an ability to improve them a little bit. Not a lot, because when you're close to 100, there's only so much left to go, but until we're at 100, I think we can do better.

[Tim E. Klasell:]

Okay. Great. Thank you very much.

[Kevin B. Thompson:]

Thank you.

[Dave Hafner:]

All right, Melissa. To everyone who tuned in, thanks very much for joining us today and that concludes our second quarter call.

[Operator:]

And once again, this does conclude our conference for today. Thank you for your participation.