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Edited Transcript of SWI.N earnings conference call or presentation 30-Oct-19 9:00pm GMT

Q3 2019 SolarWinds Corp Earnings Call

Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Solarwinds Corp earnings conference call or presentation Wednesday, October 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Hafner

SolarWinds Corporation - VP of IR

* J. Barton Kalsu

SolarWinds Corporation - Executive VP, CFO, CAO & Treasurer

* Kevin B. Thompson

SolarWinds Corporation - President, CEO & Director

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Conference Call Participants

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* Brad Alan Zelnick

Crédit Suisse AG, Research Division - MD

* Erik Loren Suppiger

JMP Securities LLC, Research Division - MD & Senior Research Analyst

* Matthew John Swanson

RBC Capital Markets, Research Division - Senior Associate

* Matthew Ryan Wells

Citigroup Inc, Research Division - Associate

* Robert Cooney Oliver

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Sanjit Kumar Singh

Morgan Stanley, Research Division - VP

* Sterling Auty

JP Morgan Chase & Co, Research Division - Senior Analyst

* Stewart Kirk Materne

Evercore ISI Institutional Equities, Research Division - Senior MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the SWI Q3 '19 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I'll now turn the call over to our host for today, Mr. Dave Hafner, VP of Investor Relations.

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David Hafner, SolarWinds Corporation - VP of IR [2]

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Thank you, Carmella. Good afternoon, everyone. Welcome to SolarWinds Third Quarter 2019 Earnings Call. With me today are Kevin Thompson, our President and CEO; and Bart Kalsu, our Executive Vice President and CFO. Following prepared remarks from Kevin and Bart, we'll have a brief question-and-answer session. Please note that this call is being simultaneously webcast on our Investor Relations website at investors.solarwinds.com.

Pleased remember that certain statements made during the call, including those concerning our financial outlook, our expectations regarding growth and profitability, our planned investments and our expectations regarding the impact of those investments, our market opportunities, including opportunities within our existing customer base, our market share, our product road map and our key growth initiatives are forward-looking statements.

These statements are subject to a number of risks, uncertainties and assumptions described in our SEC filings, including the risk factors discussed in our Form 10-K that was filed on February 25, 2019 and the Form 10-Q that we plan to file by November 14, 2019.

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. The cautionary statements regarding these forward-looking statements are further described in today's press release.

Unless otherwise noted, all 2019 results that will be discussed on today's call will include adjustments for the adoption of ASC 606, and all 2018 financial measures discussed today will be presented on an ASC 605 basis. All year-over-year comparisons will be impacted by these adjustments in 2019 unless otherwise noted. The tables accompanying today's press release include a presentation of our 2019 results on a 606 and a 605 basis. We will also provide our results and outlook for revenue growth rates on a constant currency basis to provide a framework for assessing our performance and how we expect our business to perform, excluding the effect of foreign currency fluctuations.

Our use and calculation of these non-GAAP financial measures are further 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, including adjustments for the impact of ASC 606. However, each non-GAAP item in our forward-looking financial outlook that we'll provide today has not been reconciled to the comparable GAAP outlook item because providing projections of changes in individual balance sheet and income statement amounts is not possible without unreasonable effort, and release of such reconciliations would imply an inappropriate degree of precision. Unless otherwise indicated, references to profitability and comparable measures refer to such measures on a non-GAAP basis.

With that, I'll now turn the call over to Kevin.

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [3]

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Thanks, Dave. And thanks to everyone, for joining us on today's call. Stepping back and looking at our performance in the first 9 months of 2019, I'm pleased with the same momentum with we entered the year. This has allowed us to drive 14% constant currency non-GAAP total revenue growth in the first 9 months of the year and adjusted EBITDA of over $330 million.

We're also pleased to report that we delivered solid results in the third quarter. Non-GAAP total revenue was approximately $243 million in the quarter, reflecting year-over-year growth of 15% on a constant currency basis, and adjusted EBITDA was $115 million, which was above the high-end of our outlook.

We're quickly approaching and expect to reach one of our goals in the business in fourth quarter of this year, which is delivering our first quarter in which total revenues for the company exceed $250 million.

When we openly reach this milestone, it will put us in an elite class of enterprise software companies, which have reached $1 billion in annual revenue run rate, and we will have done that on delivering a level of profitability and cash flow rarely seen in software.

Third quarter license and maintenance revenue totaled over $158 million on a constant currency basis, reflecting growth of 8% versus the prior year. Our license and maintenance revenue growth has remained at a consistent level for the first 3 quarters of the year, illustrating the consistent high single-digit growth we have stated that we believe we can drive in this part of our business.

This consistent growth has resulted from the strength of our competitive positioning in the network and systems management market, where we have continued to build market share using our extremely broad monitoring and management coverage of all key aspects of IT infrastructure and the compelling value proposition of our product, which are priced meaningfully lower than most of our competition.

In fact, according to Gartner's June 2019 market share analysis report on the IT Operations management performance analysis software market, we now hold the #3 rank as measured by 2018 software revenue. We are pleased with this progress and are focused on driving our business at the #1 rank over the next several years.

Turning to the components for our license and maintenance revenue. Our maintenance revenue continued to show consistent and durable growth in the third quarter, driven by strong maintenance renewal rates. These renewal rates have been at or above 95% on a trailing 12-month basis for the last 4 quarters in a row, which contributed to constant currency maintenance revenue growth of 12% for the third quarter. While our license revenue growth in the quarter was slightly lower than average levels that we have delivered the last 6 quarters, we feel good overall about our license sales performance in the quarter.

We've continued to drive growth in international, including EMEA despite an uncertain [political] environment in U.K., specifically for small businesses that we feel tend to be more conservative than large companies when there's political, economic volatility. We also had a strong quarter of sale performance in the Americas, with a number of positive trends to the business, including a record number of $100,000 plus transaction.

However, as we were going up against the largest single quarter of U.S. Federal license sales we've ever delivered, which was in the third quarter 2018, it was a difficult growth to compare. But that being said, we delivered the second strongest quarter of U.S. Federal license sales in our history in the third quarter 2019 and had good Americas commercial growth. We entered Q4 of feeling positive about momentum in our core IT business and our ability to continue to drive high single-digit license and maintenance revenue growth on a year-over-year basis.

Transacting to our subscription business, third quarter's subscription revenue grew 28% on a constant currency basis, reflecting strong MSP billings growth as well as solid growth contributions from both our cloud infrastructure and application management products as well as SolarWinds Service Desk.

Overall, I'm pleased with the momentum we're seeing in our subscription product, including those we acquired this year. This momentum has resulted in an acceleration in non-GAAP subscription revenue growth each quarter through the first 3 quarters of the year.

This growth has, to a large part, been driven by our MSP products, where we have seen strong cohort growth, rapid adoption of our new advanced endpoint protection offering, momentum beginning to build for our new transport management and IT documentation management offering.

However, despite the accelerated growth, I do not believe that we've taken full advantage of the cloud infrastructure and application management market opportunity in front of us. We've invested a small fraction of what our competitors in this market are spending on go-to-market activities. As a result, while revenue growth from these products has accelerated as we move through the year, the acceleration has been slower than we had planned. This is reflected in a smaller contribution to subscription revenue growth from these products and compared what was contemplated in the high-end of our subscription revenue outlook for the year.

The cloud infrastructure and application management market is still in its early stages. The competitors in this market are relatively young companies with modern products, and they have an approach to digital demand creation that is comparable to our own approach.

While we continue to believe we have created a very broad, strong and differentiated portfolio of cloud native and cloud agnostic products, we have taken a disruptive approach to pricing and feel that we're better in digital marketing than our competitors, we have not been investing at a level that has allowed us to rise above the noise in this early stage market.

We're planning to begin to address this in the fourth quarter by taking advantage of the fact that we're well ahead of the pace in delivering our adjusted EBITDA outlook for the year. We will accelerate investment and go-to-market activities, including incremental expansion of our sales efforts and higher levels of marketing spending, which we believe will increase our momentum in the cloud infrastructure and application management market heading into 2020.

Bart will discuss financial impact of these incremental investments on our results for the year in his remarks related to our fourth quarter outlook. We've continued to build strong and growing customer relationships across each of our product lines, as our customers rely on our products to monitor and manage larger and larger portions of their hybrid IT infrastructure environment.

In the trailing 12-month period ended September 30, 2019, we had 857 customers spend over $100,000 with us, which is an increase from 780 customers at the end of the second quarter. As you can see, we delivered a very strong third quarter of customer growth as the number of customers reaching $100,000 in annual spend threshold grew meaningfully on a sequential basis. In addition, while we're building larger customer relationships at an accelerating rate, we also continue to add a very high volume of new customers, averaging almost 7,000 per quarter for the last 12 months.

With that, I'll now turn the call over to Bart, who'll walk you through the additional details of our third quarter financial results and provide you with our outlook for the fourth quarter.

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J. Barton Kalsu, SolarWinds Corporation - Executive VP, CFO, CAO & Treasurer [4]

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Thanks, Kevin, and thanks, again, to everyone joining us on today's call. Before I begin my remarks, I want to provide a little context. First, our GAAP results for the third quarter are presented in detail in our third quarter press release. I also want to provide a quick reminder that we will discuss financial information on this call on a non-GAAP basis and that we are presenting results as calculated under ASC 606, which aligns with the third quarter outlook we provided on our second quarter earnings call in August.

The adjustments to revenue and expenses required by ASC 606 netted to an immaterial difference. As a reminder, our operating results for the third quarter and the year-to-date period ended September 30, 2019, include the results of Samanage from May 2019 forward. We have included the revenues of Samanage in our results on a non-GAAP basis, which is consistent with the second quarter and with our previously provided outlook.

As Kevin indicated in his comments, the third quarter was another core quarter of solid execution. We were within the range of our outlook for the quarter related to non-GAAP total revenue and finished with $242.7 million, representing year-over-year growth of 15% on a constant currency basis. Non-GAAP recurring revenue was 82% of non-GAAP total revenue for the third quarter. I'll now walk you through the financial details of our third quarter results and then provide you with our outlook for the fourth quarter and full year before turning it over to Kevin for some final thoughts.

Third quarter revenue growth was led by non-GAAP subscription revenue of $85.3 million, which grew 26% year-over-year on a reported basis and 28% on a constant currency basis. We have continued to add products organically and through acquisitions that expand our subscription revenue stream. New customer acquisition has been solid and customer expansion activities have delivered strong recent cohort growth.

The growth in dollars was led by our MSP product line, and we got solid contribution from our cloud infrastructure and application management products, where we saw accelerated sequential growth in the third quarter and also saw solid performance from our new ITSM product that came from the Samanage acquisition.

Diving a bit more into the details of our subscription revenue performance, we saw strong early contribution from our new advanced endpoint protection offering by our MSP customers in the third quarter.

We are excited about the opportunity we see to be a leader in delivering a security solution that MSPs need to protect the IT environments of their small business customers and plan to make this a continued area of product expansion focus.

As we indicated in our second quarter call, we also kicked off a new sales team to focus on selling our cloud infrastructure and application management products into our core IT customer base, and this team has already had some success, which we plan to build on in the fourth quarter. And finally, our subscription net retention rate remained consistent at 105% for the trailing 12 month. Total non-GAAP license and maintenance revenue was $157.4 million for the third quarter, which was an increase of 8% year-over-year on a reported and constant currency basis.

Looking at the components of license and maintenance revenue for the third quarter, non-GAAP maintenance revenue was $113.8 million, which was an increase of 11% year-over-year on a reported basis and an increase of 12% on a constant currency basis. Our maintenance renewal rates continue to be strong at 95% on a trailing 12-month basis through the end of the third quarter of 2019.

License revenue for the third quarter 2019 totaled $43.6 million, which is consistent with license revenue in the third quarter of 2018, which as Kevin indicated in his comments, we believe is a solid result, given the fact that the year-ago quarter was a very strong license sales quarter for us.

As Kevin mentioned earlier, we exceeded our outlook for non-GAAP profitability in the third quarter of 2019, delivering a $115 million in adjusted EBITDA for year-over-year growth of 8%. We are pleased with our ability to drive such high adjusted EBITDA in the first full quarter after we completed a dilutive acquisition.

Non-GAAP expenses were approximately $131.7 million in the third quarter of 2019, which includes $20.2 million of non-GAAP cost of revenue and a $111.6 million in non-GAAP operating expenses, which reflects an 18% year-over-year increase for the quarter, which is slightly lower than what we included in our outlook for the quarter as a result of slower-than-anticipated hiring and lower-than-expected variable marketing expenses.

Sales and marketing expense as a percentage of revenue remained consistent as compared to the second quarter, even as subscription revenue became a bigger percentage of our total revenue.

The total number of new customers that we've added across our business continues to be at very high level, and we have driven this result with a very consistent level of sales and marketing spend.

With that said, in the fourth quarter, as Kevin indicated, we plan to make incremental investments in our marketing efforts around our brand and product awareness of our cloud infrastructure and application management products. This will total approximately $2 million of incremental go-to-market spending in the fourth quarter.

Finally, we ended the quarter with $221.1 million of cash, the increase since the end of the second quarter is reflective of our ability to convert earnings to cash flow. Cash collections were strong in the third quarter and DSOs at September 30, 2019 were 39 days. As of September 30, our net leverage was 3.9x trailing 12 month adjusted EBITDA compared to 4.2x at June 30.

Our outlook for net leverage is for the ratio to be approximately 3.5 to 3.6x by the end of 2019, assuming no additional acquisition activity or other activities outside the ordinary course.

I will now walk you through our updated outlook for the full year, and our outlook for the fourth quarter of 2019 before turning it over to Kevin for some final thoughts.

Please note that the revenue, adjusted EBITDA and the EPS outlook we are providing today, will be based on the ASC 606. Okay. I'll first walk you through our updated outlook for the full year.

Foreign currency exchange rates are a bit of a moving target these days. Our updated outlook for the fourth quarter assumes a euro to USD exchange rate of 1.11 versus our initial 2019 assumption of 1.14. We're assuming a pound to dollar exchange rate of 1.26 versus our initial 2019 assumption of 1.30. As a reminder, the strengthening of the U.S. dollar against these 2 key currencies is the root of most of our foreign currency headwinds so far in 2019.

Our assumptions for other foreign currency exchange rates that we are exposed to are also lower against the U.S. dollars than they were in February but these rates have a smaller impact on our outlook.

Al keep in mind that foreign currency fluctuations have a larger relative impact on our subscription revenue than on our license and maintenance revenue streams. Based on our results for the first 9 months of 2019, we are updating our 2019 revenue outlook for the full year as follows: we now expect that our full year 2019 non-GAAP total revenue to be in the range of $938 million to $943.5 million, representing growth of 12% to 13% over total non-GAAP revenue in 2018.

Adjusting our full year 2019 outlook using the same foreign currency rates that we experienced in 2018 results in constant currency growth of 14% or $951 million to $956.5 million in total revenue for the year. We expect total license and maintenance revenue to be in the range of $613 million to $617 million, representing growth of approximately 8% on a reported basis and approximately 9% on a constant currency basis.

Non-GAAP subscription revenue is expected to be approximately $325.5 million to $326.5 million, representing growth of approximately 22% on a reported basis and approximately 25% on a constant currency basis.

Adjusted EBITDA is expected to be in the range of $451 million to $453 million, representing an estimated adjusted EBITDA margin for the full year of approximately 48%. Non-GAAP fully diluted earnings per share is expected to be in the range of $0.82 to $0.83 per share, assuming an estimated $311.5 million diluted shares outstanding for 2019.

Our full year 2019 EPS outlook reflects an assumed 21% non-GAAP tax rate and our current outlook assumes that we will make approximately $45 million in cash tax payments in 2019, as compared to only $9 million in 2018.

Now turning to our outlook for the fourth quarter of 2019. For the fourth quarter, we expect total non-GAAP revenue to be in the range of $249 million to $254.5 million, representing year-over-year growth of 12% to 15% on a reported basis and 13% to 16% growth on a constant currency basis.

Total license and maintenance revenue for the fourth quarter is expected to be in the range of $161 million to $165.5 million, representing growth of 6% to 9% on a reported basis and 7% to 10% on a constant currency basis.

Subscription revenue is expected to be in the range of $88 million to $89 million, representing growth of 26% to 28% on a reported basis and 28% to 29% on a constant currency basis.

We expect adjusted EBITDA to be in the range of $120 million to $122 million for the fourth quarter, representing an adjusted EBITDA margin of approximately 48%.

Non-GAAP fully diluted earnings per share is expected to be between $0.22 and $0.23 per share, assuming an estimated 312.2 million diluted shares outstanding for the fourth quarter. Our outlook for the fourth quarter assumes a non-GAAP tax rate of 22% and that we'll make $9 million in cash tax payments in the fourth quarter.

And last, we plan to provide our initial outlook for 2020 at our Investor and Analyst Day on December 11 in New York. We hope to see all of you there. With that, I will now turn the call back over to Kevin.

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [5]

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Thanks, Bart. A quick summary of our comments on the third quarter and the first 9 months of this year. We feel positive about our third quarter results and our performance for the first 9 months of 2019. We have consistently delivered total constant currency license and maintenance revenue growth in the high single-digit to low-double digit.

And in addition, we've driven constant currency license revenue growth in each quarter 2019 within or above the range of year-over-year growth of flat 2%, which we have previously -- which we've said previously, we consider a strong level of performance.

In the quarters in which we deliver great license sales performance and we believe that the opportunity continues to exist for us to deliver great license sales quarters, we expect it will be above 2% year-over-year growth. We've also seen our subscription revenue stream show another in a series of quarters of consistent constant currency revenue growth in the high teens to low 20% range and this growth rate has accelerated as we've moved through the year. In addition, we've accelerated the rate in which we're building large customer relationships, while maintaining the velocity of our business.

And finally, our customer retention rate is measured by maintenance renewal rates and subscription net retention rates have remained high. As we wrap up, I want to provide a glimpse into some of the exciting product work we're doing right now, which we believe will further differentiate our ability [to] provide a deeper and broader level of visibility into the performance of hybrid IT infrastructures than any of our competitors will be able to provide.

In a true SolarWinds fashion, we intend to provide this capability at a price point that cannot be matched. As I said, it will only be a glimpse into some of the cool new stuff we're working on as we will go into much more details at our Analyst and Investor Day on December 11, which will be holding in the New York Stock Exchange.

In the fourth quarter, we're launching a new campaign focused on all of the capabilities we have developed to help customers manage, monitor and secure their Microsoft Azure environment.

Over the course of 2019, we've developed capabilities across our network management, systems management, security, application management and ITSM product portfolios, which will help our customers create a bridge for the journey to Azure into IT operations management across hybrid and multi-cloud environment.

Through product releases we've already done this year and product releases that are planned for the fourth quarter and early 2020, we have added or plan to add a depth of capabilities and we believe no other performance management vendor has today.

Two of the key capabilities related to Azure we're providing or soon provide are: improved time to value for our customers with the ability to deploy our entire Orion based suite products into Azure from a Microsoft Azure marketplace. In addition, we will provide deep monitoring of commercial and custom applications hosted on Azure with insights across Azure infrastructure and platform services through SolarWinds Server & Application Monitor and SolarWinds AppOptics.

In our cloud infrastructure and application management product line, we're driving towards delivering a deeply integrated cloud infrastructure management and APM suite, which will include common dashboards across AppOptics, Pingdom, Loggly and Papertrail that provides users with the single pane of glass connecting metrics, traces, logs and user experience together to provide full visibility into all aspects of application performance.

In our MSP product portfolio, we're focused on continuing to leverage the knowledge and the deep technology coverage we have in our core IT operations management business to allow MSPs to be more successful in serving their customers and in running their businesses. We're working on bringing more and more of the power of our Orion-based network management products to our MSP platform. We've already migrated the capability of SolarWinds network topology mapping onto our MSP product platform and are now focused on bringing the capability of SolarWinds' network configuration monitor to the MSP market in the first half of 2020.

And last, during the third quarter, we released a new asset management capability for SolarWinds Service Desk to make it incredibly easy for IT pros at discovery endpoints connected to the network to scan for changes to those endpoints and identify new ones in real time.

And in the fourth quarter, we plan to release a set of deeper integration between SolarWinds Service Desk and our Orion products that will help us more effectively attack the large opportunity to cross-sell SolarWind's Service Desk into our core IT customer base.

These are just a few of the exciting things that we have planned for late 2019 and early 2020 that we believe will continue to increase the relevance of our product portfolio across all areas of the IT operations market we serve. We plan to share much more about our product road map and technology direction at our Analyst and Investor Day.

With that, we'll open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Brad Zelnick.

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Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [2]

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Clearly, a lot of great things happening at SolarWinds. And I personally get excited by a number of the innovations that you talked about at the end of your prepared remarks, Kevin.

But Kevin, as we think about your license results, and I appreciate everything you've already shared about a tough Federal comp and a lot of things that went really well in the quarter in North America and then in EMEA, but you still come a little bit shy of expectations.

Just wondering how much of this you would attribute to pricing versus perhaps deals not closing in the time that you would expect? And are there any changes in competitive dynamic that we should be thinking about?

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [3]

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Yes. So in terms of competitive dynamics, no real changes over the course of this year. I think we've got a set of competitors that really are pretty broad, right? We've got the old competitors from this space, many of which are getting smaller and going away. We're taking market share from them, which is why we're now #3 in the IT management market as measured by Gartner, and we're #4 measured by IDC, and we're #1 in network management.

So kind of the historical competitors we've had, in that part of the competitive environment it actually -- those vendors are getting weaker. We are taking share. We also have a little bit of competition from the cloud management vendors, but really, that's more on the cloud infrastructure and application management part of our business. And there, they are very strong competitors, but really not having any impact on the license side of our business.

When you, kind of, look at how the quarter played out, we had good international growth. We're definitely are seeing just a little bit of noise in Europe, particularly in U.K., so the growth there was not as strong as it has been in the past. We had good Americas growth, and was really the only place where we didn't grow being in Federal and we had a really great quarter.

We had a great volume quarter, actually, a much stronger volume-based quarter this year than we did in the year ago quarter, where we didn't have as many large Federal transactions closed this year as we did last year. So I feel really good about the overall performance. I feel actually very good about how our Federal team performed, second largest quarter we've ever delivered, and we delivered it at a very high volume of transactions, which is the way I like to see business come in.

So overall -- so we feel very good about not just where we were in the quarter, it was a good quarter, wouldn't call it a great quarter but it was a good quarter, but it felt like we've got good momentum, we're well positioned as we move into the fourth quarter and well positioned as we move into next year in that license and maintenance part of our business to continue to take share. And as I said, I think we've got some work to do on the cloud infrastructure and application management part of our business to deliver the kind of growth that I believe we can deliver because that's where we're really behind a little bit.

But it's not because we don't have a great product, it's just we are -- we've been running the true SolarWinds model, we've taken a very small part of our business and run it at a very high level of profitability, while we're trying to drive growth. And I think when you really -- we kind of step back and look at our performance, we're going have to be willing to spend just a little bit more money in that part of our business in order to drive a level of growth that we believe that we can, because we have a little better set of competitors there.

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Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [4]

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That's very helpful commentary. And actually just wanted to follow-up on that last point for both you and Bart, spoke about the success you're having participating in the cloud end market opportunity, while spending less than competitors.

And you've got some strong competitors, as you say, that are willing to lose money. So to what extent should we think about increased investments being necessary to maintain current growth levels versus accelerating the business in light of such robust market opportunity?

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J. Barton Kalsu, SolarWinds Corporation - Executive VP, CFO, CAO & Treasurer [5]

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So we talked about the fact that we're going to increase our go-to-market spending in that -- in our cloud infrastructure and application management business in the fourth quarter. We're going to increase that spend by about $2 million on the marketing side. And we're hoping that, that will drive new growth for us.

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [6]

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Yes. I think as we think about how we move forward, Brad, we're still working through what that's going to look like in 2020. We'll talk about our 2020 plan at Analyst Day.

But what I want to make sure we're doing is that we are disrupting that market, that we are taking more than our fair share, that we are doing what we do really well, which is serve the entire market, from very small to very large, because the reality of the cloud infrastructure and application management market today is most of the growth you're being -- that is being driven by the other vendors in the marketplace is being driven at a very high end market.

They've all added outside sales side. They're trying to close $100,000 plus transaction because the market is still relatively early. And I think our goal always been with any product we bring to market in any part of the market we decide to compete in, is we want to be competitive across the entire market, make sure the price points allow every company that needs the technology to be able to afford to buy it.

And we make the product really easy to use, but we've got to do a better job than we're doing right now in creating awareness of all the capabilities we have. We've gone to several SolarWinds user groups, which I think you've attended one in the past. And even our customers don't know all of the things we can do, though -- we do for them in cloud infrastructure and application management, and we got to make sure we solve that problem, we tell people these are all the capabilities we have.

And by the way, we're half the cost of a Datadog, we're 75% less than an app D. We are meaningfully less expensive than a New Relic because we really are disruptive in the way we're approaching that market, just not enough people know it.

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Operator [7]

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Your next question comes from the line of Sterling Auty.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [8]

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So I just wanted to go back and clarify, I wasn't 100% clear, the softness in, specifically, the license, you had the Fed quarter, but it sounds like that was good against the tough compare. Was all of the sluggishness isolated to EMEA? And was that all macro or something else?

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [9]

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Yes, certainly there are 2 things, Sterling. So one, we're actually were down a little bit year-over-year in Federal, because last year was a record quarter. We had a very strong quarter in the third -- in this year's third quarter, but it wasn't quite at the level of what we saw last year. So second biggest quarter we've ever had in U.S. Federal, it's a really great quarter, but definitely down year-over-year.

And then we saw a reduction in growth rate in Europe. We didn't decline year-over-year in Europe, but the growth rate in Europe was not as robust as it has been over the last 2 years. So we definitely are seeing a little bit of noise.

And what I would say is it's really in the -- what we believe is that the small business end in really the U.K. market, where they have [hammer] more small businesses, we can just -- we will tend to notice the changes in buying behavior a little earlier than companies that just sell at the CIO level of closing very large transactions because those companies set and forget their budgets and they'll reset budgets when they get to the next year, whereas small businesses tend to be a little more reactive if they're feeling uncertain.

So still growing, but not at the level we have been growing. Really, the only area of decline was in U.S. Federal. And like I said, great quarter. We just had a really tough compared we were going up against.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [10]

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Okay. And then one follow-up. The investment that you're planning at the end of the year, it sounds like it's both on R&D and sales and marketing. But I just want to make sure, I understand, do you feel like there's still some disparity, if you will, on feature functionality relative to the Datadogs, New Relics, et cetera, that you need to accomplish as well as increasing the awareness of your products? Or -- just help me understand the split of the investment.

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [11]

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Yes. So the incremental $2 million, as Bart talked about, is really going to go all to marketing. So there'll be sales and marketing activities to really create high levels of awareness of the set of problems we can solve, how strong our products are and how great the pricing is for our products compared to anybody else in that marketplace that has any traction in any way.

Right now, I don't know every little player in that market, but at least the larger players, we have a meaningful price advantage as compared against them. In terms of technology capability and functionality, what I would say is we have a broader suite of technologies we believe than any of the larger players, but some of them have a little more depth in certain areas than we do.

We do everything from custom metrics to log, to distribute tracing to end-user experience monitoring. We do that across some products that are fully integrated into the same platform and some products that are integrated in the UI level, but not integrated at the platform level.

So is there certain areas where our competitors have deeper functionality than we do? Yes, that has always been true at SolarWinds. We're never going to be the deepest provider on any individual day in the marketplace in terms of technology capability, but we will catch up over time.

So I don't think it's a technology capability perspective, we can go and win a lot of business and we are winning business against those companies. They have just outspent us by a very, very wide margin. And I don't think we need to spend what they spend, by the way.

They're spending at a level where they hit declining economic returns on every dollar they spend, which is something we try not to do. But I think we have been more cautious than we should be -- if we want to create a really aggressive, rapidly growing disruptive business in a space that's growing very, very fast.

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Operator [12]

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Your next question comes from the line of Sanjit Singh.

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Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [13]

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And an early congrats on seeing that $1 billion run rate on -- hell of a accomplishment. Maybe two questions on different sides of the product portfolio. First, maybe on the MSP business, Kevin, I was wondering if you could give us any additional metrics or color on what multiproduct adoption looks like, particularly outside remote management and monitoring.

I know in your script, you mentioned advanced [depth] protection seems to be one where you're seeing a lot of uptake. But just in terms of like kind of the other parts of the portfolio and multiproduct adoption more generally, what is sort of the progress there?

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [14]

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Yes. So when you look at the MSP market, there's a bunch of technologies that MSPs are buying and then providing as a service through their small customers that they serve all around the world.

We have a pretty broad portfolio. We added 3 new offerings in the second and third quarters and that we are now selling into that customer base. So we added advanced endpoint protection, we added a config management, we had added IT documentation management.

So we've got, depending on how you count those, kind of 13 to 16 products that we can sell through to our MSPs and they can turn around sales through to their end customers.

The majority of our MSPs are -- there are 2 things going -- 2 dynamics going on: one, the majority of them are not -- are buying from us less than half of the solutions that we sell to them. We are adding to that. We're doing a good job of cross-selling and upselling, it's happened in a pretty consistent pace.

We're actually seeing better cohort growth this year than we did last year, which means we're seeing a higher rate of adoption of new products and additional products by our MSPs, but we still got a long runway to get those MSPs to do 2 things: one, buy all the capabilities we have. And keep in mind, the dynamics of that market is they buy a capability from us and they got to turn around and sell that capability through to their end customer.

So what we help them do is we brought them the knowledge and marketing collateral, that allow them to convince their end customers, they want that additional service.

So kind of 2-step sale process. We convince them and then they convince their end customer, and that's something we're doing as part of our marketing activities really every day. And I -- we're doing a, kind of, better and better job of that over the last 18 months.

So we're seeing good traction. We're seeing an acceleration and pickup, I mentioned. The advanced endpoint protection we're offering is doing really well. It's getting -- adopted by our customers very, very quickly, a lot of runway because we only had it since early this quarter or early in the third quarter, that we had pick up very, very quickly.

And now the password management momentum is beginning to build and we're seeing a number of customers pick that up. So long runway for us to continue to drive just growth in the customers by getting them to adopt more of our technology.

The other kind of interesting thing about the MSP market is that MSPs will use -- they will usually use one remote monitoring provider, but they may use multiple backup providers. They may use multiple security offerings.

And why they do that? Because when they add an end customer, that end customer may have had a piece of technology they were already using or that someone else was using to manage a part of their environment, whether it's part of the security environment, whether it's backup, whatever it might happen to be.

And so the MSP has to do is -- over period of time, what the MSP wants to do is get that end customer to stop using those disparate pieces of technology and consolidate down all of the technology the MSP wants to offer. But that actually takes a little bit of time.

So there's a -- there's really great growth opportunity to impact both of those aspects of growth. In addition, we will help the MSPs gain new customers, which is the other leg of the stool. So really 3 vectors of growth that we're trying to leverage every day inside of our MSP customer base.

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Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [15]

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That makes a ton of sense. And for my follow-up question, I wanted to go back to the core, actually, the, sort of, first major product that is around network monitoring.

And I guess the question is, as the network seems to be changing, and it's, sort of, becoming a policy fabric to connect to other clouds, as kind of the role of the network is changing and how it's becoming more software defined, in terms of that core network management business, to what extent does that have to evolve with some -- of how the broader network is being deployed within your customer base?

Is there more -- is there another class of capabilities that you need to build? Are you sort of ahead of those trends? Just wanted to get an update on the core network management.

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [16]

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Yes. So it's a really good point. Look, the network is absolutely changing. The great thing about that is the network infrastructure, just think about connectivity for a minute between user and application, wherever the application happens to sit and where the user happens to be, that connectivity has become more critical today than it's ever been, because the applications are so widely distributed today compared to where users sit, that performance can get impacted negatively in a lot of different ways.

And when that performance gets impacted, you have to very quickly, as an IT operation pro or DevOps pro, be able to ascertain where is the problem, what's causing the problem, so that you very quickly can solve that problem and either prevent users from being impacted or if users are being impacted, you can -- you make that impact go away and make the infrastructure and the network run as fast as it possibly can.

So network management, which is great for us, is becoming more critical, not less critical. There are more -- I'm going to use (inaudible) for a minute then I'll explain it. There are more network nodes today that need to manage than ever before, and the number of network nodes is going to continue to grow. Now that node is changing and it's more effective.

That node is not always a piece of hardware today. In some cases, it is piece of hardware. In some cases, it is not a piece of hardware, it's not something you can see, touch and feel, it's something that is much more software defined. So you think about computing at the edge of the network, you think about the WAN and how you are going to help data move across the WAN and how traffic moves across the WAN to get to those endpoints and get to those users, we're going to have to be able to provide a level of visibility tomorrow that is much deeper than the level of visibility we provided today.

Today, I can provide you some level of visibility across all of those environments. I can provide you some level of visibility in terms of the connection between the user and the application, even if the user is behind the firewall and the application is sitting in AWS, the application sitting in Salesforce or wherever it happens to sit, we can provide some level of visibility into all of that.

However, what we believe is that there's a level of visibility that we don't provide yet. And by the way, no one else does either of any real size and even no one really provides all those we need to be able to provide, that we're going to have to create.

And whether that means we're going to build it or maybe we find some small companies that's rated and we buy it and then we integrate it into our offerings. But there is another opportunity, it's probably a good way to put it, of growth in the network management market that is coming, it is not that far off, and we believe we can participate in.

It will be more cloud based, it will be more software defined, which mean it'll be a little bit harder because there won't be as much standardization around protocols as there are -- as there is with hardware, but that's something that we already know how to deal with, we just haven't solved all the problems, yet. Why? Because they're not all as well defined yet we need them to be.

Don't forget that one of the key to our success has been, we like our problems well understood and well defined and the user can tell us. This is exactly how we want the problem to be solved.

That way, when we build the product for them, this is analogy I've been using lately it's like a -- if you're a Marvel fan anyway, it's like a Spiderman suit, somehow it fits to everyone. Well that's how we build products. We build products that really fits everyone and fits everyone in a custom way without us having to customize the product.

That means we have to really be able to understand the problem, which is why you haven't seen us start talking about yet when that's coming. But oh, by the way, we're going to talk about a bunch of cool stuff at Analyst Day. And this area of computing is something we'll talk about.

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Operator [17]

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Your next question comes from the line of Brent Thill.

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Unidentified Analyst, [18]

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This is [Lovall] on for Brent. I was wondering if I could ask a couple of questions. One was, I know you guys have released a bunch of new features on the SolarWinds Service Desk side. I was wondering if you could offer some more insight into how you view this product going forward, especially as it competes with ServiceNow or other vendors. And what kind of growth can it drive in the future?

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [19]

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Yes. So look, I think the key features we've released over the last really since we made the acquisition and -- early in the second quarter, is the discovery. And asset -- and some really expanded asset management capabilities.

We've already released some amount of incremental integration between SolarWinds Services Desk and our core IT set of products, but we've got a lot more -- a lot deeper integration coming in this quarter, which will make that product lot more compelling to our SolarWinds' customer base.

In terms of growth rate, what we said back on Q2 call is that we believe that the ITSM product could grow at a rate of 35% in 2020, over, kind of, what we said the run rate of that product was in 2019.

And we then believe in 2021, '22, '23, they can deliver a growth rate in the 30%-plus range. So big market, big opportunity. Now what I would say from a competitive perspective, is don't expect in the next 24 months that we're going to be going head-to-head with ServiceNow because that's not how we enter markets. When we enter a market, we're going to be in a market where the product is really good, is really easy to use, is priced competitively.

We're going to be disruptive from a pricing point of view, we're going to be disruptive from a go-to-market perspective. We're not going to solve every problem right off the bat that every large enterprise customer wants to solve.

And ServiceNow is only focused on maybe the top 1,000 companies in the world, and they're really focused on the top 500 companies in the world. And with their new CEO, maybe they'll focus on the top 100 companies in the world. He's even a larger enterprise guy than their old CEO was. So you're not going to see us being -- going -- go head-to-head with ServiceNow.

You'll see us really focused in the mid-market. You'll focus -- we'll focus on the small- and medium-size business. We'll focus on the midsized enterprise, not the Global 2000. And I think we'll see some success in departments of large enterprises, where they don't want to use the ServiceNow because they're looking for something that's a lot more lightweight, that's a lot easier to use.

Now fast forward, 4 or 5 years from now and we will be competing with the largest vendors, so that ServiceNow and whoever else is still in that marketplace, we will be competing with them, just like we did in the network management market. I got here in 2006, we were not competing with the HP, the CA to be able to (inaudible), we're now #1 in that market.

We'll get there, but we get there over time. We don't build to the large enterprises as a destination, we just make our product get better every time we release it, it'll solve a greater set of problems, it will be more scalable.

Hopefully, it will be good enough, strong enough compelling enough, the largest companies in the world will use it to manage their entire infrastructure from an IT source management perspective, but that's not where we focus right off the bat.

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Unidentified Analyst, [20]

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Got it. And a quick follow-up. I know last quarter, you've provided some commentary on the M&A strategy, specifically, SolarWinds and you guys have done a bunch of deals. Is that still a core focus of the strategy? And what kind of space or sectors are you, sort of, looking at to disrupt?

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [21]

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We've always believed that having a core capability and confidence around M&A, the ability to do deals, bring companies into our portfolio, put the product in our go-to-market motion, make them begin to sell at a faster rate, at a much higher level of profitability, is an important part of how we can grow. It's how we've gotten a very broad product portfolio very quickly.

And -- so we continue to believe that's a part of the growth strategy as we move forward. That being said, we don't build M&A activity into our outlook until the deals are done, because you never know what transaction you're going to be able to close and which ones you aren't.

We've very selective about the products we buy, and that's a #1 priority. Is the product really good? Does it deploy quickly? Does it show value immediately? Is it easier for users and intuitive? Can we price it at a really competitive rate and be disruptive in the market? If all of that's true, then maybe we'll make an acquisition instead of buying technology.

So we'll continue to aggressively look. It doesn't mean we'll aggressively buy because we've got to find something that meets our criteria. Haven't bought any things since last time we talked. So -- maybe we didn't find anything in the last 90 days, but we'll see what we find over the next 12, 18, 24 months, but we'll continue to look aggressively, but we're going to be very selective about what we acquire if we make acquisitions.

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Operator [22]

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Your next question comes from the line of Rob Oliver.

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Robert Cooney Oliver, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [23]

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Just wanted to follow-up a little bit on trying to get the attach rates up on the cloud products. And Kevin, I know you and I've talked a little bit in the past, but in our experience attending some of the SolarWinds user groups, we've always been positively impressed by that user experience team that you have down there in Austin.

And I'm wondering as you charge that new internal sales force to go out and sell cloud, if there's a way for them to cross pollinate with that team or if they're already doing it because, certainly, those guys seem to have a great rapport with your current installed base on the core side?

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [24]

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Yes. Look, I think, Rob, we've not done that at the level we should, but we are beginning to do that -- do it a level we should now is probably the way to put it. You will see us being much more comprehensive, is maybe a good word.

When we're talking to our user community about all the products we have and all the problems we've solved, I think one of the things that we did, we did for a good reason. But then now we're at the point that it needs to change is because our cloud product portfolio came through a series of acquisitions. We spend a bunch of time making sure we got those acquisitions integrated, then we took those products we integrated them into a single platform. As a result, we ran that group of products relatively separately over the last couple of years.

What you'll see us doing even now, if you look at our website, if you look at some of our marketing messaging, even if you listen to my script, we will begin to talk about those products in a very, very connected way.

We'll share a bunch of that thinking once we get to the Analyst Day in terms of how they're thinking has now evolved and what it's going to look like as we move into 2020, 2021, because you're right, we've got a great loyal set of customers -- we've got a great team that has phenomenal relationship with those customers, and we've not done a great job in making sure those customers understand all the problems that we can solve for them.

And look, it's always a challenge when you have a lot of products, and we have a lot of products. But the challenge that we've been good at solving in the past, and we've not been as good at it with this particular portfolio of technologies, but we absolutely will be better at it and also we get great at it as we move into the future.

But it's a really good point and one that we actually step back and say, hey, we got these great relationships, these guys want these products from us, we need to tell them we have them. And we've got to start telling a, I call it, a one SolarWinds story, because we are one company, one set of technology solution that we sell to a profile buyer to solve a very similar set of problem, they may solve them a little bit differently and the problem may exist in different locations, we've got to make sure we're doing a great job in telling them one SolarWinds story, and we are very focused on doing that in the fourth quarter as we move into next year.

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Operator [25]

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Question comes from the line of Matt Hedberg.

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Matthew John Swanson, RBC Capital Markets, Research Division - Senior Associate [26]

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This is actually Matt Swanson on for Matt. So Kevin, you released a survey during the quarter, kind of highlighting the skills or training gap in tech right now. Could you just talk about how prevalent this topic is with like your customers and partners in terms of driving buying decisions? And just maybe how that varies between SMB, mid-market and enterprise?

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [27]

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Yes. So look, I think the last part of your question was a really good part of the question, which is how does that vary between small business, mid-market and enterprise.

When you look at what's happening and kind of connect it back to our business in the managed service provider market, the reason the managed service provider market has grown so quickly over the last, kind of, 6 years and why we think that market is going to continue to grow is because there is a really dire shortage of skill sets on the IT ops side and on the DevOps side for companies all around the world.

And small businesses just cannot be competitive, they can't be competitive in terms of pay, they can't be competitive in terms of business. And for that matter, they really can't be competitive in terms of breadth and scope of the role and so they are really struggling to be able to hire people who have the skills they need them to have to be able to manage today in this very, very complex IT infrastructure world.

So the MSP market is going to continue to grow because more and more small businesses are going to turn to the MSPs and say, hey, I cannot hire enough people, I can't hire enough skill sets, I can't afford to have the breadth of skills that I need, I need you to be able to solve that problem for me.

So it's one of the drivers of growth in the MSP market. It also -- because it drives growth not just because you can't get IT pros and other technology pros, but also because there's a lot of technology challenges today. And even if you can hire them, you can't hire enough of those to have the breadth of knowledge you need to have to be able to address all of the issues you have.

So that's definitely driving growth in the MSP market. We're absolutely seeing that it's becoming more important that products simply work because there are not as many sophisticated technology pros out there to hire and a lot of the technology pros that are enrolled where they're still learning, right?

Maybe they knew network really well, maybe they knew network and system really well. Now they're trying to learn database and security and cloud, and they're trying to learn multiple public clouds as almost everybody is in a multi-cloud environment. And those technology pros need us to make the products solve the problems in a simple way because they simply can't keep up with a rate of change.

And we're hearing a lot from our users that you need to be able to provide a technology solution that tell us where to go, that tell us where to look, they tell us what the problem is. We don't have the time, and in many cases, we don't have the knowledge yet. And we want to build it, but we don't have it yet. We needed YouTube kind of -- we need to spoonfeed it to us a little bit so that we can keep up.

And I think if you're -- if the vendors they're able to do that, I think you're going to be really, really successful as we move into the next, kind of 3, to 5 years in technology. The vendors who were not good at thinking about what does the UI look like? How does the product work? Does the product make it intuitive and easy for the user to understand what I need to do right now to solve the problem in front of me? Does it identify the problems in a really rapid and intuitive way? If you can't do that, I think you're really going to struggle.

And I think you've even seen that with some of the platforms out there, if you listen to the comments New Relic made around their old platform and in their new platform, New Relic One, I don't know how good New Relic One was, but the problem with the old New Relic platform is it wasn't meeting that bar. And as a result, they had to do something about it.

So there's not that many vendors who're positioned to do something about it, right? There's a handful of us, I think, in the market that are in a position from a technology perspective to be able to provide all of that. I think those will be the winners and the rest will be the losers, because I think it's going to be critically important.

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Matthew John Swanson, RBC Capital Markets, Research Division - Senior Associate [28]

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That's really helpful. And then I know it's early days, but one product we got excited about last quarter was the security event manager. Is there any update around that?

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [29]

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So we are doing better this quarter than the last quarter, which is great. We don't talk about from a product -- revenue perspective. But we have -- we've gotten some traction, which is good in the MSSP market, and in the MSP market.

And we mentioned -- Bart mentioned in his comments that we want to be as a leading provider of security solutions to the MSPs, not just the MSSPs, because MSPs want to provide a lot of those security solutions, so they don't lose revenue to their MSSP cousins.

And so they need us to provide really simple security solution because they don't run a stock, they don't have much of security experts on their team and security event monitor is a product that can be that.

And so we've done kind of -- taken 2 approaches to that market. One, we've gone out and signed up some MSSPs that are providing a service using our product to MSPs so they can provide a service to their customers because the MSPs still want to be in the loop.

So that helps us allow the MSPs to be able to provide a higher set of security services to their customers without having to hire staff of security experts and without having to build the stock because all that's expensive and hard to do.

Al we're trying to make sure that product's easy enough to use, that MSP could use it on their own. We're not quite there yet on ease-of-use of that product. But that's what we're working on from a technology perspective.

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Operator [30]

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Your next question comes from the line of Matthew Wells.

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Matthew Ryan Wells, Citigroup Inc, Research Division - Associate [31]

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I just want to dig into the incremental $2 million in spend that you highlighted? And can you just talk about how that's going to be allocated between maybe your existing product set within the subscription revenue base versus the acquired, specifically, the Samanage asset?

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [32]

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Yes. So that $2 million Bart talked about is really focused on primary cloud infrastructure and application management, which is a product that we've had. They're managing, as Bart said, the public cloud and private cloud for that matter. We're cloud agnostic, we're going to all the clouds.

So it's primarily going to be there. And there'll be some incremental spending in our kind of on-premise application management products that connect to that cloud infrastructure and application management product offering, but really primarily in marketing, little bit on sales, really nothing, no material incremental amounts that we believe we need to spend right now on our Service Desk offering.

We've already got a good budget there. I think we're spending at the level we need to spend in order to drive the level of growth that I want to drive. So no really incremental spending there right now.

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Matthew Ryan Wells, Citigroup Inc, Research Division - Associate [33]

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Got it. That's helpful. And any softness in the subscription base? If you're just sizing that, do you think it came from, kind of, the organic drivers or the recently acquired through managed assets?

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [34]

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It came -- as I indicated in my comments, it's really cloud infrastructure and application management, where we saw acceleration in growth in the third quarter, and we think we'll see acceleration in growth in the fourth quarter, but the level of acceleration is not where we had planned for it to be.

So that's really where we're seeing a little bit of softness still growth, just not -- it's still acceleration. It's not acceleration at the level we had built into our plan. And that acceleration, by the way, is less the level that is acceptable to me. We should be accelerating at a higher level than we are. It's a great market, we have great products. We just have to do a much better job of execution, and we have to make sure we're investing at the right level.

So that's really where it came from. I guess -- as Bart, I think indicated in his comments, the services product performed consistent with our expectations. So that is where we thought it would be and MSP had a strong quarter. So it's really the cloud infrastructure and application management part of our subscription revenue stream, where we've got to see a higher level of acceleration than what we're seeing. Good thing is it's all acceleration. Bad thing is it wasn't at the level that we had built into our plan.

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David Hafner, SolarWinds Corporation - VP of IR [35]

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Carmella, we have time to take more questions, sorry to cut you out there.

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Operator [36]

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Question's from the line of Kirk Materne.

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Stewart Kirk Materne, Evercore ISI Institutional Equities, Research Division - Senior MD [37]

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Appreciate squeezing me in. Kevin, I was just wondering about the MSP business, where is that geographically? Is that pretty much all of the U.S. right now? And what's the opportunity for maybe seeing some expansion internationally with that part of the business, in particular? I know it's been going well, but I was just wondering if you could kind of refresh me on sort of the opportunity for that business more broadly?

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [38]

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Yes. So what I would say is it's a global business, but it's primarily a North American, European and Australian business. So we have very little penetration outside of Australia and Asia-Pac.

We've got good coverage across much of Europe, some markets were stronger than others, some markets are more mature as the companies that relates to the MSP market than others. But it's pretty much a Pan-European business. It's a very strong American business and its Australia business and Asia-Pac.

So where are the growth opportunities? There's a big growth opportunity, I think, outside of Australia and Asia Pacific. One of the things we'll focus on in 2020, we'll talk about that more at Analyst Day.

And al I think there's -- we can penetrate Europe more aggressively than we have. We're relatively channel dependent in channel dependent, meaning there's a channel partner between us and MSP, in lot of Europe, and that's okay. But I think we're a little more reactive and a little less proactive than I'd like us to be.

And so I think there's an opportunity to grow more aggressively in Europe, in countries where we're not as direct in our presence, and we're really relying [king of a] lot of partner to be us in those markets, and there was good reason to do that. And we'll continue to leverage those partners and great relationships with those partners. So I think we can help them grow faster, we can help ourselves grow faster by having more of a direct presence.

And there's still an opportunity to grow in the Americas. I think 2 things are going to happen: one, I think the number of MSPs will continue to grow. That market is growing somewhere in the kind of 15% plus rate, depending on whose data you look at.

But we've been taking share, we should be able to continue to take share and I told the team I expect them to accelerate the rate at which they're taking share. I think all those things are possible if we execute well. But in terms of greenfield, Asia is really the biggest greenfield opportunity because it really is an Australian business for us today.

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Operator [39]

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Your next question comes from the line of Erik Suppiger.

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Erik Loren Suppiger, JMP Securities LLC, Research Division - MD & Senior Research Analyst [40]

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Coming back to the cloud infrastructure, do you coexist in accounts with the likes of Datadog and New Relic? And do you think that, that market is going to consolidate or converge around single vendor solutions because there's a lot of discussion from those vendors about expanding into each other's markets and trying to become the sole solution. So I want to know how you fit into that.

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [41]

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Yes. So look I -- so I think it will consolidate into company picking a single vendor? No. And why is the answer no?

It never really has in any area of technology for lots of different reasons: one, is vendor lock-in, customers don't like to be locked to a single vendor; two, the reality is no one does everything incredibly well when you get to a solution that has gotten lots of pieces and parts to it.

And so as a result, you tend to suboptimize if you pick a single vendor because you're not going to get a little of visibility you need across all the areas of your infrastructure.

The other reality is different vendors have different price points they're able to solve problems for you at and certain problems -- you should only be willing to pay a certain price in order to solve those problems.

So I don't think we're going to end up in a world where every company is going to pick a single vendor to do their cloud infrastructure and application management. I think there will be multi vendors, just like they've been across every other technology across the history of time.

Now do I believe it's important to have an integrated solution where you integrate metrics traces along end-user experience? Yes, I believe it's important that you can offer integration between the solutions to those problems, but I also think it's really important that you allow a customer to just buy those individual capabilities if that's what they want to buy.

You make that super easy for them to do that, and you make those capabilities interoperable across vendors, which is what we've always done across all the products we bring to market, and we'll do the same in the cloud infrastructure and application management market.

Because I'm already hearing, for example, I talked -- talked to a number of CIOs lately, not because I'm calling on CIOs, not -- because I'm looking for a Board member and I want to add a CIO to my Board, it's not I'd like to call the CIOs lately.

And I forget, one of the things they tell me is, look, we love [to build up] certain areas of our infrastructure, and we want to -- but we -- want to look at logs across our entire infrastructure, but we can't afford to use them across our entire infrastructure.

We don't want to use across our entire infrastructure. Give me something that's really cheap and easy to use in another area of infrastructure. Just a point to make -- that kind of supports the point, we're not going to end up in the single-vendor world.

I know the stories they're telling, but you've heard that story before from CA, from HP, from IBM, from Quest, from BMC and the list goes on and where are they? They're not really here anymore.

So it's going to be a really important to solve individual problems well at a price that makes sense. It's going to be important to integrate those solutions together when customers need them integrated, which is what we do a great job of, although (inaudible).

It is going to be important to be able to allow customers to use one of our products with the product from somebody else, which is what we are more than willing to do because I don't need to own a customer. I'm happy to deploy alongside and solve the problems we're going to solve really well at a price point we're going to solve them at no one else can touch, and let them use somebody else to solve problem also.

So that's where I think we'll end up. But I understand why they're telling that story because it's a good story.

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Erik Loren Suppiger, JMP Securities LLC, Research Division - MD & Senior Research Analyst [42]

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Do you coexist with the likes of a Splunk or Datadog in the majority of your accounts right now?

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [43]

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Almost all, right? I mean but not necessarily the cloud set of our product portfolio today. But keep in mind, we've got all 500 of the Fortune 500, we almost all of the Global 1000 and we have almost all of the Global 2000 as customers.

We have over 300,000 customers around the world. And most large companies around the world use us somewhere in their infrastructure. So we absolutely coexist today with all of those companies. And in fact, with most of them we're going to have many -- in many cases we have a larger footprint than they have. In other cases, we'll have the smaller footprint than they have with those customers.

So we coexist today, I think we'll continue to coexist. The advantage we have is that we have an ability to solve the on-premise and off-premise problem in a way no one else can. And Datadog and New Relic, they can't solve the on-premise problems even close to the level of depth that we can.

They're never going to have a level of network visibility we have, they're not going to have the level of on-premise capabilities that we have, that we spent 20 years building. And -- but we do have much of the capability they have in the cloud because they don't even build those capabilities for 6 to 7 years, and we've built them over 4 or 5 years. So they don't have the kind of lead in the cloud that we have on premise.

And then our ability to connect those problems, which, once again, we'll talk about, what does that really mean? Because that's a really easy thing to say and a much harder thing to understand. We'll talk about that more at Analyst Day. But our ability to connect those problems, we think is a key differentiator that will give us a competitive advantage.

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Erik Loren Suppiger, JMP Securities LLC, Research Division - MD & Senior Research Analyst [44]

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Okay. And last one, you had mentioned both Splunk and Datadog. Are those the 2 that you see the most or who do you think you see the most?

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Kevin B. Thompson, SolarWinds Corporation - President, CEO & Director [45]

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So look, I think if you look at just sheer volume of customers, Datadog's got -- it's around 8,000 customers, which is a piddly amount of customers compared to the number we have, but it's still a lot of customers for a software company.

And so we're going to see them more sheer just based on the number of customers they have. We don't see them a lot, and they will tell you don't see us hardly at all and they're right because we are in -- we're in smaller business than they are. We're in a lot of the customers they're in, but we're in very, very small levels in those environments.

So they're going to tell you, they don't feel like we're much of a competitor on the cloud side right now. And while I've got more cloud customers than they have, they're right. We don't really compete with them in those in the parts of the business they're selling into.

Splunk, not so much. Splunk is so focused on the large enterprise, they don't sell to any midsized businesses. They sell to very, very few, even midsized enterprises, we don't see them very often. We employ alongside them some with our LogMein management product because it's really cheap and cheerful and it allows people to solve the problems particularly around compliance that they want to solve as it doesn't make sense to use going forward.

So with that I think we're going to wrap it up. We've got a little bit over time. I appreciate all of the questions, they were great. And hopefully we'll see everyone on the call at our Investor and Analyst Day coming up on December 11. Thanks a lot.

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Operator [46]

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This does conclude today's presentation. You may now disconnect.