SolarWinds Corp

NYSE:SWI

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to the SolarWinds First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Howard Ma, Senior Director of Investor Relations. Thank you. Please go ahead.

[Howard Ma, Senior Director-Investor Relations]

Thank you, Sheryl. Good afternoon, everyone and welcome to SolarWinds’ first quarter 2020 earnings call. With me today are Kevin Thompson, our President and CEO; and Bart Kalsu, our Chief Financial Officer. Following prepared remarks from Kevin and Bart, we'll have a brief question-and-answer session. The call is being simultaneously webcast on our Investor Relations website at investors.solarwinds.com.

On our Investor Relations website, you can also find our earnings press release and a summary slide deck, which is intended to supplement our prepared remarks during today's call and provides a reconciliation of differences between GAAP and non-GAAP financial measures.

Please remember that certain statements made during this call, including those concerning our financial outlook, our expectations regarding growth, profitability and operating expenses, our liquidity position and expectations regarding collections and cash flows. Our beliefs regarding the impact of the COVID-19 pandemic and related global economic environment on our business, our beliefs regarding our positioning, competitive advantage and market positions in the global economic environment and our expectations regarding the adoption of subscription pricing initiative, our forward-looking statements.

These statements are subject to a number of risks, uncertainties and assumptions described in our earnings release and SEC filings, including the risk factors discussed in our Form 10-K that was filed on February 24 and Form 10-Q that we plan to file by May 11, 2020.

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.

Unless otherwise specified, we will refer to non-GAAP financial measures on the call and references to profitability and comparable measures refer to such measures on a non-GAAP basis. The non-GAAP financial measures provided should not be considered in isolation or as a substitute for the most comparable GAAP financial measures.

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. 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.

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

[Kevin Thompson, President and Chief Executive Officer]

Thanks Howard. First, we sincerely hope that you and your families and colleagues are all well during an unprecedented time. This has been and will continue to be a difficult period for some time to come. However, even in the middle of it all, we have seen many extraordinary acts of compassion, that for me, at least, provide hope in a much brighter future.

As a company, we acted quickly and effectively to protect the health and safety of all our employees in response to COVID-19, including accommodating a work-from-home environment in mid-March for our entire global staff. As you'll be able to see as we go through our first quarter results, we did this in a manner that allowed us to maintain employee productivity, which is a testament to the discipline and reliance on process with which we have run our business for the last 14 years.

However, we could not have accomplished this without the incredible level of commitment from the SolarWinds IT team, who have gone above and beyond the call of duty over the last seven weeks. I want to take a moment to thank not only the SolarWinds’ IT team, but also all the IT professionals out there, who have put in an amazing level of effort over the last seven weeks to ensure that employees and businesses around the world can continue to operate and be productive during this period of disruption. Many times, your efforts are not noticed or appreciated. But in this crisis, you have been the heroes of businesses all over the world.

Turning to the purpose of our call. Today, we will spend some time highlighting our first quarter 2020 results, discussing how our business trended over the course of the first quarter and any meaningful changes from those trends in April. Then we will spend more time than usual, focusing on our view of the business going forward in the light of the significantly uncertain environment we are in.

I'm pleased to report that in the face of the rapidly changing global economic environment that became increasingly volatile as we moved through the first quarter, we had what I consider to be a very strong start to 2020, delivering approximately $250 million in total revenue on a constant currency basis, exceeding the high end of our constant currency first quarter outlook and reflecting 16% year-over-year growth.

In addition, we also started the year with a solid quarter of profitability, generating approximately $111 million in adjusted EBITDA for the first quarter. We had several operating highlights in the first quarter that I would like to quickly touch on. First, year-over-year non-GAAP subscription revenue growth in the first quarter increased to 33% from 28% in the fourth quarter of 2019, which reflects the fourth consecutive quarter of accelerated non-GAAP subscription revenue growth.

This growth was driven by improved performance from our MSP business, which makes up the great majority of our subscription revenue today, consistent contribution from our cloud infrastructure and application management products, strong revenue from our IT service management products and better-than-expected bookings performance from our cloud database management product, which we acquired in December of 2019.

Second, we saw strong ARR growth in the first quarter, with total ARR reaching $862 million as of March 31, reflecting year-over-year growth of 15% on a reported basis and 17% on a constant currency basis. As a reminder, ARR includes the annual value of our maintenance and subscription relationships with our customers.

Third, we have continued to see strong growth in a number of our large customer relationships, reflected by the number of customers who spent over $100,000 with us on a trailing 12 month basis, increasing on a year-over-year basis by 22% to 926 customers. We also saw meaningful year-over-year growth in the first quarter in new product sales transactions greater than $50,000, with many of those transactions closing in the month of March.

Creating significant relationships with our customers has been a focus for the last 15 months, and we're pleased with the progress we have made. The first quarter of 2020 was certainly one of the more interesting 90-day periods of my professional lifetime. The quarter began with a lot of positive market momentum and all our employees around the world were working from SolarWinds offices.

By the end of the quarter, our entire global staff was working from home and the positive market momentum has disappeared. Specifically as it relates to our business, we started the first quarter at a fast pace relative to most quarters across the key areas of our business, including product and geography.

As we moved into the middle of the first quarter, we saw the pace begin to slow. The slowest period occurred during the middle two weeks of March when most companies around the world sent their workforce to home, which created a disruption as those employees settled into their new work environment.

However, the first quarter has finished strong over the last seven business days as activity levels measured in terms of trials of our products, quality conversations with potential customers and deal closing pace increased meaningfully from the middle of March. In a business departure from our normal pattern, I thought I would provide some color on the positioning of our business as we have entered a difficult and uncertain economic period.

Our perspective, the impact of the rapidly slowing economic environment on the purchasing behavior of IT organizations around the world and what we have done to respond to the new global work home environment we had found ourselves in. Overall, we believe that we are well-positioned to successfully weather the current economic storm in a way that many software companies are not.

Our highly recurring revenue model, coupled with our very profitable business model, the fact that our products address critical issues and problems that must be addressed, the resilience of our unlevered free cash flows and the focus on efficient operations, which has been a hallmark of the SolarWinds model for over 20 years, has provided us with the business foundation that we believe will create a competitive advantage as the world continues to deal with, and then ultimately begin to recover from, the recession caused by COVID-19.

Due to the breadth and diversity of our customer base, we do not have a concentration of revenue risk in any segment or vertical industry but rather are exposed to the overall volatility and uncertainty that currently exists in the market at large. As a result of the power of our go-to-market model, which allows us to successfully reach and probably sell to companies of all sizes, we do have a larger number of small business customers than many other enterprise software companies, and these small business customers span all vertical industries and levels of technology dependency and complexity.

So while there is an increased level of risk at the individual small business customer level and an economic slowdown, the level of aggregate risk is not as great as the level of individual customer risk due to the diversity of the types of smallness that we serve. As we have considered the level of risk across the market and its impact on the full year 2020, we have assumed we will see a small amount of degradation in some of the operational metrics which we track, including the number of trials of our products on a quarterly basis, conversion rates of trials to opportunities and opportunity to close one deal and customer retention rates.

Our business is driven by the velocity and volume of the transactions that we closed. As we move through the second quarter, we are focused on the daily and weekly pricing of all the areas of our go-to-market activity, from demand trends, to opportunity and pipeline creation, to conversion rates of opportunities to close one deal. In addition, we are closely tracking the customer renewal and retention trends across each of our product lines.

At this point in the second quarter, we have seen the pacing of these operational metrics track within a range of flat to down a few percentage points as compared to the 2019 second quarter, which means that while business activity is not increasing on a year-over-year basis, it also has not fallen dramatically.

In addition, over the last several weeks, we've seen certain of these operational metrics began to stabilize and show signs of improvement. We believe that the large, globally distributed and diverse nature of our customer base provides us with a unique perspective in environments like the one we find ourselves in. Over the last four months, we have seen a rapid and dramatic change in the procurement patterns of technology buyers.

Over the course of the first quarter, technology buyers, both inside a corporate IT organization as well as at MSPs, shifted their focus from the implementation and expansion of applications and application environments to a focus on ensuring that their organization's IT infrastructures are capable of securely handling a massive increase in remote traffic while still performing at the level of speed and availability that their businesses demand.

In direct terms, we have seen a shift from an application-centric view of IT to an infrastructure-centric view of it. As all indications point the company is continuing to be more remote throughout 2020 than they have been historically, it is our view that technology pros key themes for the remainder of the year will be the availability, performance and security of the existing IT infrastructure and application on which their businesses rely.

As a result, we believe the level of new application deployment and application expansion will be reduced significantly for the remainder of 2020. In addition, to the extent the companies are deploying new technologies, we see a higher level of urgency to get new technologies implemented and delivering value very quickly. Based on our interactions with technology pros, we are hearing that the pressure on IT budgets have increased and then additional budget pressures are expected as we move through the second quarter and into the second half of 2020.

We plan to use these budget pressures to our advantage, while leveraging our low-cost approach to pricing, and the speed with which our products can be deployed and begin to deliver value. As we shift to discuss what we were doing to position SolarWinds to drive growth over the remainder of 2020, in this new world we have found ourselves operating in, I want to first focus on the change that we did not have to make that almost every other company in enterprise software is still struggling with it.

Our go-to-market motion over the last 14 years has been based on digital marketing and selling from the inside model. As a result, restrictions of global travel and in-person events have had no meaningful impact on how we market and sell. And while we have been honing our digital marketing and selling from the inside model for the past 14 years, during this entire period, our products have also been designed and developed to make our go-to-market motion work.

This means that our products are architected to deploy quickly, usually within minutes or hours instead of months or quarters, without the need for customization or professional services. And in addition, have been designed to show immediate value. With this combination of product characteristics and capabilities and go-to-market motion that is required to be successful in a digital marketing, remote touch, inside sales approach.

For the last 20 years, we have managed nearly all aspects of our go-to-market motion and our relationships with our customers remotely. We have historically done this primarily from SolarWinds' offices around the world and had only a small percentage of our global workforce working from home.

Our team is working from home instead of from one of our offices, has been the only real meaningful change for us over the last seven weeks. That transition has gone smoothly as our teams are simply using the same tools that they have always used to remotely market to, sell to and support our customers from a different physical location. This environment will continue to present challenges for the remainder of 2020 for sure.

Technology pros are facing uncertain situations. And while they have always been under budget pressure and required to do more with less, the unprecedented circumstances of COVID-19 will only make this situation more acute. Today's challenges have amplified the need for the partners that technology pros rely on, like SolarWinds, to ensure their products are not only easy and fast implement and easy to use but are also easy to buy and consist the needs of any budget.

Over our 20 year plus history, we have made this commitment to technology growth, and we continue to honor and we intend to continue to honor that commitment now when they need us the most. Across the business, we are evaluating how and where we can create more affordability and flexibility for our customers. To that end, on April 21, we launched subscription pricing options for each of the key products in our Orion family of network, systems and database management products.

Offering a subscription pricing model for our key on-premise deployed products is another way that we continue to directly respond to input from our tech pro community, many of whom have indicated that they need greater flexibility and procurement options in a lower barrier entry to our product portfolio.

Given the difficult economic environment which we have just entered, we expect that this subscription pricing launch will be favorably received and should allow us to create incremental pricing disruption in the network systems and database management markets where our already low pricing just got even more affordable. The comparison of our perpetual license and subscription pricing is available at the by-product level in solarwinds.com.

However, at a high level, we use a 2.75-year payback period to arrive at our annual subscription prices when compared to our historical license and maintenance pricing model. To be clear, we are adding an option for customers and prospects of our network systems and database management product to pay ratably if they prefer to, rather than purchasing under perpetual license and maintenance model, which was historically the only way these products can be purchased from us. We are not forcing any transition to a subscription pricing model for these products.

I will now turn the call over to Bart to share a few additional details regarding our first quarter performance, our outlook for the second quarter and some thoughts on how we are approaching the year.

[Bart Kalsu, Chief Financial Officer]

Thanks, Kevin, and thanks again to everyone joining us on today's call. Before I begin my remarks on the first quarter results, I want to provide a little context in a couple of critical areas given the environment that we are in. The first area I want to address is liquidity. As of March 31, 2020, we had $237 million in cash on-hand. This is an increase of $64 million since December 31, 2019, and that increase includes a quarter where we made $35 million in interest and annual bonus payments.

We converted a high amount of our EBITDA to cash flow during the first quarter and expect to see our conversion rate increase as we move through the remaining three quarters of 2020. Based on our adjusted EBITDA margins, high cash flow conversion, and the fact that our debt does not mature until 2024, we believe our liquidity position is strong and provides us with a competitive advantage in this turbulent economic environment.

The second area is around our business operations, and the impact of COVID-19 on our cost structure. As Kevin discussed, our go-to-market motion of selling from the inside with a focus on digital marketing is virtually the same now as before the disruption caused by COVID-19. In addition, we have been focused on building a low cost operating model for the last 14 years with a disciplined approach to build-in talented teams and locations that allow us to maintain the efficiency of the model and to keep our costs at a level much lower than industry averages.

So while other companies may be trying to find ways to take costs out of their business right now, we are in a position where we can invest in our business on a measured basis even in this economic slowdown. As far as our results for the first quarter, our GAAP results are presented in detail on our first quarter press release. For compatibility purposes, however, we will discuss the first quarter financial information on this call on a non-GAAP basis. We present the reconciliation of our GAAP to non-GAAP results in our first quarter press release.

We believe that the shift in our revenue profile over the past five years to a highly recurring revenue model has positioned does with a resilient financial model that will endure difficult economic environment, such as the one we expect to face this year. During the first quarter, 85% of our total revenue was recurring and recognized as either maintenance or subscription revenue. Total non-GAAP revenue for the first quarter was $248.5 million, reflecting year-over-year growth of 15%, which is at the high-end of our outlook range that we provided on our fourth quarter 2019 earnings call in February. And total non-GAAP recurring revenue for the first quarter increased by 19% year-over-year, making $211.5 million.

First quarter revenue growth was led by non-GAAP subscription revenue of $95.1 million, which grew 33% year-over-year. Our subscription net retention rate on a trailing 12 month basis for the first quarter was 106%, led by a 108% net retention rate for our MSP business. On a constant currency basis, these numbers would have been 107% and 109% respectively. Total non-GAAP license and maintenance revenue increased year-over-year by 6% to 153.3 million on a reported basis for the first quarter.

For the first quarter, non-GAAP maintenance revenue was $116.3 million, which was a 9.5% increase over the prior year first quarter. Over the prior year first – I'm sorry, the prior year first quarter amount of $106.3 million. Maintenance renewal rates have remained strong and were 92% on both the reported and constant currency basis, for the trailing 12 month period ended March 31st. Maintenance renewal rates in the first quarter of 2020 were negatively impacted by both a plan downgrade of one large U.S. federal maintenance renewal, due to the program moving into a maintenance phase and by the strengthening of the us dollar against other foreign currencies.

Non-GAAP license revenue in the first quarter total $37 million, reflecting a year-over-year decrease of approximately 2.6% on a reported basis and 2% on a constant currency basis. We feel good about our license sales performance in a difficult and volatile quarter. We had solid growth in Asia Pacific, driven by the continued success of our global system integrator initiatives. Strong growth from our U.S. federal and state and local government business and as Kevin indicated, high growth in the expansion of our large customer relationships.

As per the disruption caused by COVID-19, we have been tracking to a quarter of license sales performance within our target range of flat to 2% growth. We also had a very strong quarter of non-GAAP profitability in the first quarter of 2020. First quarter adjusted EBITDA was $110.9, million representing an adjusted EBITDA margin of 45% and the year-over-year growth of 6%. It’s probably a good time to remind everyone that approximately 34% of our revenue is from outside North America. So we had a meaningful level of exposure to changes in foreign currency rates on our total revenue. Foreign currency rates are very volatile right now, due to the various actions of governments around the world to try and mitigate the impact of COVID-19. We have continued to provide our results on a constant currency basis to better reflect our performance, excluding these rate changes.

I'm going to quickly provide a view of the year-over-year operational growth of our first quarter revenues on a constant currency basis. Total revenue for the first quarter was approximately $250.2 million and grew 16% year-over-year. Subscription revenue, which is our fastest growing revenue stream was $96.1 million on a constant currency basis for the first quarter reflecting year-over-year growth of 34%. And finally, total license and maintenance revenue on a constant currency basis was $154.1 million for the first quarter, which reflects 7% growth.

Now turning to cash flows for the first quarter. We converted 82% of our adjusted EBITDA and the cash flow in the first quarter, which resulted in first quarter of 2020 unlevered free cash flow of approximately $91 million. Our unlevered free cash flow conversion rate is generally at its lowest level for each year in the first quarter, primarily due to the annual bonus payment for prior year performance and tax payments made in the first quarter related to prior year end. DSO at March 31, 2020 were 45 days, which is consistent with DSO at year end and only one day higher than March 31st, 2019. So as of the end of the first quarter, we had not seen an impact on cash collection rates from COVID-19. In addition, cash collection rates for the month of April have been within the range of our 2019 average daily collection rates. However, given the economic environment we are tracking cash collection velocity daily to make sure that if any issues arise that we see them in real time.

Turning to expenses. non-GAAP expenses were $142.8 million in the first quarter of 2020, which includes $22 million of non-GAAP cost of revenue and $120.8 million in non-GAAP operating expenses, this represented a 24% year-over-year increase in total expenses for the quarter. The increase in expenses as a percentage of revenue compared to the first year – and compared to the prior year first quarter was primarily driven by the acquisitions of Samanage and VividCortex, which were made in the second and fourth quarters of 2019 respectively.

In addition, we increased our reserve for doubtful accounts by approximately $2 million at the end of March, as well as increasing certain return reserve accounts that reduce revenue by an additional $700,000. These charges were to a large extent driven by the current economic environment. We intend to operate our business for the remainder of 2020, such that our total expenses will grow in line with total revenue growth. Earnings per share on a non-GAAP basis for the first quarter totaled $0.20 based on $312.9 million fully diluted shares outstanding.

Finally, as I said earlier, we ended the quarter with $237 million of cash. Our net leverage dropped to 3.7 times trailing 12 month adjusted EBITDA at the end of the first quarter from 3.9 times at December 31st. Our debt is currently at $1.95 billion and the interest rate is at LIBOR plus 275. We are comfortable with our ability to service our existing debt at its current cost level and expect to grow our cash balance during the remainder of 2020.

I would now like to update you on our outlook for the full year and the second quarter. As it relates to the full year, there is significant uncertainty around the duration of the COVID-19 pandemic and the pace of economic recovery across many industries and geographies. We believe that having a broad and diversified customer base can be a competitive advantage in all economic environment, but it also means we have segments within our customer base that may be impacted by the slowdown more than others. We're confident that we will successfully navigate through these uncertain times, given our proven go-to-market strategy and the criticality of our IT management products, while still investing in areas of our business is sustained growth and profitability.

But even with the competence we have in the resilience of our business, the range of outcomes for the remainder of the year is difficult to predict with a level of precision that we are accustomed to providing. As such, we believe it is prudent to withdraw our 2020 outlook for revenue, adjusted EBITDA and earnings per share, which were provided on February 4th, 2020. Instead, at this time, we will only provide our outlooks for the second quarter of 2020.

With that being said, let's move for our second quarter outlook. I want to provide a view into our thought process around the development of the second quarter outlook that I'm about to provide. With respect to revenue outlook, we're providing an outlook for just total non-GAAP revenue rather than the components of revenue, which we have typically provided in the past. We have made this decision given the uncertainty in the environment and also when taking into account our new subscription pricing option that Kevin discussed in his remarks, which will result in some shifts between the license and subscription revenue buckets. The magnitude of which we do not expect to be material in the second quarter, but it is difficult to predict with the current level of market volatility.

We will have more insight into the success of these offerings after we see a full quarter of activity which we will share on our second quarter earnings call. Therefore, we believe we can provide a greater degree of precision and accuracy for total revenue growth for the second quarter then for each of the individual components. We have arrived at our second quarter outlook with a high level of focus on the trends we have experienced over the last seven weeks. Our outlook now assumes a euro to USD exchange rate of 1.08 versus our prior assumption of 1.11 and 1.23 for the British pound versus our prior assumption of 1.28.

Now turning to our outlook for the second quarter. For the second quarter of 2020 on a non-GAAP basis, we expect total revenue to be in the range of $240 million to $248 million, representing year-over-year growth of 4% to 8% on a reported basis or 6% to 9% on a constant currency basis, assuming foreign currency exchange rates from the second quarter of 2019. In addition, assuming the 1.1 euro to U.S. dollar and 1.28 pound to dollar exchange rates that we assumed in our first quarter and full year 2020 outlook, our Q2 total revenue outlook would be for growth of 5% to 9%. This second quarter outlook assumes a maintenance renewal rate in the low-90% range and subscription net retention rates in the range of 101% to 103%.

Our adjusted EBITDA outlook for the second quarter is a range of $108 million to $112 million, which results in a range of earnings per share of $0.20 to $0.21 per share, assuming the weighted average number of shares outstanding of $315 million. Our earnings per share guidance assumes a non-GAAP effective tax rate for the second quarter of 2020 will be approximately 22%.

Now I wanted to quickly provide a few qualitative thoughts on the full year. We expect to deliver a year of growth in total revenue for the full year of 2020. We are planning to operate our business for the remainder of the year such that our adjusted EBITDA margins will rise slightly as we move through the year and we'll end the year at a full year average which is above the first quarter level. Adjusted EBITDA in dollars is expected to grow on a year-over-year basis, we are planning to operate our business such that year-over-year operating expense growth rate and total revenue growth rates will be consistent with one another for the full year. And therefore, currently expect to deliver growth on a full year basis in adjusted EBITDA for 2020 as compared to 2019.

We also expect the conversion rate of adjusting EBITDA to unlevered free cash flows to increase over the remainder of 2020 and for the full year to be consistent with the conversion rates we saw in 2019. Our expected cash payments for interest for the rest of the year will be approximately $49 million.

And with that, I will now turn the call back over to Kevin.

[Kevin Thompson, President and Chief Executive Officer]

Thanks, Bart. As Bart indicated in his comments, given the level of uncertainty around the timing and process for fully reopening not only U.S. economy, but also the EMEA and APAC economies, the range of outcomes for our full year results is difficult to predict, but the level of precision we were accustomed to being able to provide. We are therefore not providing now at this time for the second half of 2020. We hope to be in a position an outlook the second half of 2020 on our second quarter earnings call, which we anticipate holding in late July.

With that being said, I wanted to provide a view of how we’re approaching the remainder of the year. First, our business model has continued to move to higher levels of recurring revenue, with recurring revenue in the first quarter of 2020 and the percentage of total revenue reaching 85%, which is an all time high for any fiscal quarter in our history. Based on the highly recurring nature of our revenue streams, with total ARR of $862 million in March 31st, 2020, we believe our position is – our business is currently positioned to deliver solid year-over-year growth and a meaningful level of profitability in 2020.

Second, our products across our ITOM and MSP businesses address problems that must be solved to ensure that the IT infrastructure and applications, which businesses today rely on to run their operations are highly responsive and always available. Based on what we have seen in past periods of economic uncertainty and slow down, the trends in our business over the last seven weeks. In the digital transformation we have seen across all industries over the last several years. We believe that technology pros will maintain the level of investment in their existing IT infrastructure and the management of that infrastructure, as a result of its criticality to business performance.

Third, we believe the new and expanded opportunities will be created for SolarWinds over the next nine to 12 months as tech pros are forced to face constraint or declining IT budgets against increasing demand on performance of the critical infrastructure and applications. We are seeing the need to be incredibly efficient with IT and technology spend, which is not always top of mind in growth environments, it’s quickly becoming a high priority if not the top priority for IT and technology teams around the world.

In fact, we've already seen a meaningful increase over the last several weeks in the number of RFPs which we have received, where customers and prospects are seeking to consolidate their network and systems monitoring tools with a single vendor to drive cost savings. As we discussed in our Investor and Analyst Day in December, SolarWinds has become one of the few vendors left in IT management with a breadth of technology coverage to allow consolidation. And our affordable price points make it difficult for other providers of IT management software to be able to compete with us in the consolidation situation. This is where our ability to reach IT and technology team and organizations of all sizes leveraging a mature digital marketing and selling from the inside model and that our ability to offer solutions to their problems at very affordable prices, sets us apart from our competition.

Next. As I said on several occasions, we have struggled to rise above the noise in some of the newer areas of IT infrastructure management and in certain areas of the market where we had not previously competed, such as public cloud infrastructure and application management and IT service management. This is despite our belief that we have strong products, which we have historically offered a competitive price point. In a world of economic disruption and declining budgets, we are going to use aggressive pricing to raise the level of awareness of our capabilities with a goal of increasing the rate in which we’re adding new users of these products.

To that end in mid April, we launched new subscription pricing plans and campaigns in these two areas of the ITOM market, which has made our already competitive prices much more difficult for others to match as these campaigns will have the effect of lowering our prices for these products by approximately 50%. And last – due to the power of our economic model and a financial discipline with which we run our business. We are in the enviable position where we do not expect to have to do a head count reduction in 2020 to deliver a level of growth in adjusted EBITDA and cash flows to allow us to maintain a very healthy financial condition over the remainder of 2020. We believe this will put us in a unique position to be ready to execute quickly and effectively when the global economy started to climb back up.

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

[Operator]

[Operator Instructions] The first question comes from Sterling Auty of JP Morgan. Please go ahead, your line is open.

[Sterling Auty, JP Morgan]

Hey guys. I was going to talk a lot about – questions about COVID about this, about that. But when you mentioned that last part of your prepared remarks about pricing as a weapon, I think we have to start there. So going after, what looks like ITSM application performance management in the cloud, even using pricing more aggressively. I guess my question is, how do you get your solutions in front of those customers to be considered at those lower price points? So how are you going to drive the awareness? Are you going to increase marketing or is there some other way that you can raise the awareness?

[Kevin Thompson, President and Chief Executive Officer]

Yes, I don't think we're going to have to increase marketing since, Sterling, that’s not the intention. What we believe and what we've seen in other periods of economic slow down and this team has been here a very long time. I think I was 12, when I got here, I did had a whole lot more hair and no gray. What we've seen in those periods is when budget pressures come on to IT organizations, when they're faced with the issues of dealing with higher complexity in their environment, the less money and less people to deal with them, they're going to proactively go to the web and begin to search for ways to save money and still get the job done. We saw that happen in 2007, 2008, we took a tremendous amount of market share back in 2007, 2008.

Our growth slowed a little, but it slowed much less than anyone else in the market, and we didn't have to increase our spending. So we think by aggressively promoting on the web in all of our messaging that we have now reduced prices and we're already 40% to 50% less than the other players in that space. And we've reduced those prices by another 50%, then we're going to start to capture attention. And we will be able to pick up momentum and volume of customers that we're adding. And the great thing about our business, as I can do that, and I can still deliver profit on every single customer that we add. And that's the advantage we have because of the business model that we run.

So we're not planning to spend any more money to drive the message, we’re going to let the message really – to an extent drive itself by making sure that it's out there on the web for people to find. And we know the technology pros are out there looking for money to save. As I indicated on the call, we've already seen a meaningful increase in the number of RFPs that are coming into our sales department, where people are saying, hey, we need to consolidate around a single vendor, we need to say 20% or 30%. And we're one of the few bidders that can consolidate around. And we're absolutely, the vendor that can save the more money than anybody else.

[Sterling Auty, JP Morgan]

That makes sense. And then one follow-up, the net retention metric that you gave on MSP to put it into context, can you give us a sense, how big is that MSP channel at this point and how fast did it grow in the quarter?

[Kevin Thompson, President and Chief Executive Officer]

So the MSP business, we haven't talked about how exactly how large it is, but it's the majority of our subscription revenue stream. What we said is we were targeting to grow that business at 20% and that we believed that was something we could do, definitely in good environment. They'll tell you whether I can believe I can do that right now over the next few months or not. We're definitely assuming we're going to see some negative impact of the environment we're in, but that business has been performing well. And the net retention rate for those of you've been following it, as we’re getting stronger. We’re up to 109% now on a constant currency basis, back a year and a half ago, two years ago, that business was at 106.

So we've seen a meaningful improvement. Now, as we look at the rest of the year, we're taking a little bit of a cautious view and assuming that net retention rate will come down, it’s not based on necessarily on trends we've seen yet. But it’s based on some level of caution around the group of customers that our MSP business serves.

[Sterling Auty, JP Morgan]

God it. Thank you.

[Kevin Thompson, President and Chief Executive Officer]

Thank you, Sterling.

[Operator]

Your next question is from Walter Pritchard of Citi. Please go ahead, your line is open.

[Walter Pritchard, Citi]

Thanks. Two questions, just one on the environment and then one on the product side. On the environment, I understand you're not giving the full year guidance. Could you help us understand just maybe order of magnitude sort of exiting the year, how you expect the subscription piece to just play into the numbers? And then I think if I heard you right at the beginning of the call, you mentioned that it sounds like you do expect the environment to get worse throughout the year as maybe sort of a recessionary budget impact takes hold in the second half, but just wanted to clarify that on the qualitative side that you talked about with the shape of the year.

[Kevin Thompson, President and Chief Executive Officer]

Yes, definitely. As we've thought about the shape of the year and even the shape of the second quarter, we've not assumed there's going to be a real meaningful premise in the IT spending environment and really not any meaningful improvement from an economic perspective. You guys know there's a million different forecasts out there and some people think we're going to have a U-shaped recovery, some people think we're going to have a W-shaped recovery and maybe a few people still think there's going to be a B-shape recovery, I think the number of people that believe that is kind of been shrinking by the day.

We've taken a pretty conservative view and we've assumed there'll be very little recovery over the course of the rest of the year. I mean what we said, look, we're confident we're going to grow in 2020, we're confident that the level of profitability we drive in 2020 will be higher than the level of profitability we drove in 2019. And we think we can do that even in the face of some weakening of our key metrics such as net retention rates, a little bit of net weakening in renewal rates.

We've not seen that happen in other slowdown, this slow down I think is a little different than most. I think we've taken a pretty cautious view. If we get a more of a recovery than what we've expected, if we get a stronger recovery that we have baked into our view, then I believe we'll see better performance than even what we may be expecting. In terms of subscription, subscription revenue as a percentage of total revenue will grow between now and the end of the year, the [indiscernible] revenue is consistently been growing faster than our license and maintenance revenue that's going to continue. We think that'll continue to be a fast growth part of our business, really in any economic environment as we look out over the next year and beyond.

[Walter Pritchard, Citi]

And then just on probably a question on Samanage. Just, can you talk about where the success in that product is coming between the MSP partner type base and the traditional? And then just sort of the size, the range of the size of customers you're going after there and having success would be helpful to get some color now…

[Kevin Thompson, President and Chief Executive Officer]

Yes. All the revenue from Samanage today is still coming from IT organizations around the world. We're really not still actively trying to sell it into our MSP customer base. We've made the decision from a technology investment perspective, the highest growth investments we can make and continue to expand the capabilities and the ability of that product to scale for corporate IT, we’ll get to the MSP opportunity later, which is not as big and not as urgent as the opportunity we see in corporate IT. Today, most of the success we see with that product line is an organization of around kind of 500 employees to 1,000 to 1,500 employees, when you get above 1,500 employees, will our product work? Yes, it works. Does it have capabilities that are valuable? It does. But there are some capabilities that doesn't have yet.

So we're really aimed at the mid market, maybe the small end of the enterprise today and that's where I think we'll say focus with that product line over the next probably 24 months. But like every other sole one product we've ever built and brought to market with every release we're going to add capability, with every release we're going to make it scale better. Hopefully, it will serve the biggest companies in the world, just like our network management products do today, and to do that when I got here back in 2006. So you should expect a similar pattern with our Service Desk product.

[Walter Pritchard, Citi]

Great. Thanks for the color, Kevin.

[Kevin Thompson, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question is from Brad Zelnick of Credit Suisse. Please go ahead, your line is open.

[Brad Zelnick, Credit Suisse]

Excellent. Thank you so much. Kevin, I've got one for you and then a follow on – follow-up for Bart. I wanted to know what your observations have been and just in terms of customer behavior and product level interest specifically as it relates to enabling their infrastructure for the remote workforce. And I'm thinking network performance monitoring, but you can go even broader than that. And how much of the demand that you're seeing right now? Do you think is temporary versus more permanent?

[Kevin Thompson, President and Chief Executive Officer]

So look, I think we've got a permanent problem then we're going to have to solve inside of corporate IT. And then permanent problem is that the odds are and I'm going to use a word I don't usually use because I'm not talking about our business, I can use it. That, forever, we're going to see an increase in number of employees working from remote locations at least on a part time basis. I think that's an outcome that's going to come out of this environment that we've been in. That is creating a tremendous level of complexity challenge for IT organizations. Our own IT organization has been dealing with issues at a level that they've never had deals before, likely, they've got all our products dealing with those issues with and they know how to use those products because they've always used them. And so like they probably been able to conquer those challenges a little easier than others.

But there is a number of challenges that we've all seen, we've learned a lot about what do you do when all of your employees suddenly go home and they're trying to be productive from a location other than one of your buildings around the world. So that I think is going to translate into a level of interest and a level of investment in products and allow you to do that successfully. And that's not just the things like video collaboration, that is also all the other technologies you need to make sure that, it's great if you've got one of those video collaboration products, but if it's freezing every five seconds if it's going down in the middle of call, it’s really not very helpful. So the technology you need to make sure you're – infrastructure inside your firewall and outside your firewall is running, as it become even more critical.

So I think a level of interest is here to stay. We definitely saw in the middle of March had a dip in demand trends from a trial and download perspective. But we saw that come back very quickly as we moved through these March and into April. We're now back in relatively normal level and the levels have been growing kind of week-on-week. So I think the focus on the infrastructure, the performance of infrastructure, speed and availability is going to be higher moving forward than it has been maybe over the last 36 months, because we've seen what happens when availability is not where we want it to be when speed, which is in the biggest issue I think for most companies over the last seven weeks, the speed is that where you needed to be and you've got no ability to troubleshooting.

[Brad Zelnick, Credit Suisse]

That makes perfect sense. And maybe just for Bart, I was hoping you can expand on what's factored into the 2Q guidance. And I don't know how granular you can get with us, but if we think in context of the trends that you're seeing in April. And have you extrapolated them out to basically be consistent for months two and three or are you assuming some potential degradation perhaps back to what you were experiencing in mid-March? Thanks.

[Kevin Thompson, President and Chief Executive Officer]

Okay. Let me start with on the operational side and then Bart will dive into how we're going to consider that in the financial model. So operationally some of the things we've been seeing really since the middle of March is that deal cycle times are increasing, and that's probably to be expected. There's at least one additional level of approval in any transaction over $50,000 for sure, and even in transactions to $25,000, we're seeing those take a little bit longer to get through the cycle time. And then there's kind of one more sign-off before procurement is willing to issue a PO. And I think that, that is a trend that will likely continue as long as we have a lot of pressure on IT budget, I think we'll have those pressures for the rest of 2020.

The other thing we're seeing is that technology pros, at least in the last seven weeks have been incredibly busy, just making sure people can get connected. They're now kind of raising their head and they're going to get their head above water. Connections are kind of there, everybody is at home with the technology they need be able to work. Now they can step back and say, okay now, how do we make that work better, which is why I think we've seen an increase in trial activity of our products. And I think those two things are kind of the key trends we’re seeing on the sales side.

[Bart Kalsu, Chief Financial Officer]

Yes. I would try to be a little more conservative too as far as the – on the recurring pieces of our revenue. And we've talked about – and I talked about the fact that our – the renewal rates that we used in setting our second quarter outlook was in the low-90% range. And then on the subscription net retention rate, we assume that 101% to 103% range there as well. So just trying to get that – and that's reflective of the environment.

[Kevin Thompson, President and Chief Executive Officer]

And I'd say right now we're not seeing rates quite that low. We're seeing better performance than that in April. But I think we're too early, I think everyone's early for that matter, know exactly how the next few months are going to tread. So we've taken a cautious view as we really believe in May and June May actually get a little worse before we see any improvement.

[Brad Zelnick, Credit Suisse]

Great. That's really helpful guys. Thank you so much.

[Kevin Thompson, President and Chief Executive Officer]

Thanks, Brad.

[Operator]

Your next question is from Matt Hedberg of RBC Capital Markets. Please go ahead, your line is open.

[Matt Hedberg, RBC Capital Markets]

Hey guys, thanks for taking my questions. Really interesting and exciting news on the subscription offerings for the Orion family. And Kevin, I think you noticed – noted that it's too early to understand the impact and you're not forcing a transition. I'm wondering though if you can provide a bit more of a customer feedback, what are customers saying? What are MSPs saying? Because I imagine, there's a fairly high level of excitement around this new offering.

[Kevin Thompson, President and Chief Executive Officer]

Yes. I would say, look, we've been getting feedback from prospects and customers that really started maybe not until months ago saying, you know what, we need subscription pricing option, we may choose to buy a license, we need the ability to look at both, decide which budget we want to use, an operating budget or capital budget. And because so many organizations are buying so much of their technology from a subscription perspective, a larger percentage of the IT budgets have been moved into operating budgets versus capital budgets. And so our technology pros have been pretty consistent saying they at least need that option based on survey work we've done, somewhere around 50% of customers and prospects when you kind of blend them together, saying that they're highly likely to choose a subscription pricing option.

Now that being said, we think that the uptake of that for us will be gradual. We're not trying to push one versus the other, we're absolutely frictionless. We're presenting both enabled by the way you want to buy, we don't care if you buy a subscription, we don't care if you buy a license, we just care that you buy. We've already closed a handful of deals. We released subscription pricing on April 21st, we closed a handful of deals already, relatively small deals, but they closed very, very quickly within days, which is what we'd expect.

I think we'll see the initial uptake at the lower end of the market where our prices, and we said this before, we're not the lowest price provider, if you're a 100-person company looking to buy an IP document and software advantage your own environment on a license basis. Now that we've offered a sufficient pricing option, we are now one of the lowest priced providers and you get all the capabilities we have that the others don't, where prices now that are either even with ours or higher than ours.

So I think the initial traction will be at the lower end of the market. I hope I see an increase in volume of business done. And then I think we're going to see some of the larger customers begin to look at their option. Particularly, I mentioned on the call, we've had a lot of success in our global system integrator initiative that we kicked-off last year, a lot of those system integrators want to buy subscriptions because that's the way they sit around sell of their customers. I think we'll see some traction there also. So that's where I think the early traction will come from, but we're going to learn a lot over the next 10 weeks. As we go through the remainder of the quarter, and I think as we get into the second quarter call, we're going to be able to give a view of one, we think the percentage of that – the sales of Orion family of product will be subscription verses license.

[Matt Hedberg, RBC Capital Markets]

That’s great. That's helpful. And then you noted Kevin that you're in a really good position given your balance sheet and strength of cash flow to invest when others might be pulling back, which is great. I'm wondering if you could sort of rank how you pick about investing, is it more so sort of, – to Sterling's question earlier is it investing back into what you have? Maybe some additional marketing, you've made some really interesting M&A deals over the last couple of years. Might we see a little bit more M&A in this environment to maybe further build out the portfolio. Just kind of how you kind of prioritize those investments.

[Kevin Thompson, President and Chief Executive Officer]

Yes. Like I say on the M&A side, then I'm going to wait a little bit and let private companies realize their evaluations have fallen, as much as public company evaluations have fallen because VCs tend to believe that the value of their company has never fallen, it's just the value of everyone else's companies have fall. And so you got to little bit kind of live in the month for a little bit. And once they've been in that month for a while, they'll realize their businesses are not so clean, as evaluation expectations will drop. So, I'm not saying we won't do any M&A between now and the end of the year, but I am saying, we're going to have valuation expectations fall.

And to the extent we do M&A, we're going to make sure we're doing. We're going to do it in valuations that are consistent with the environment we're in and the environment, I think we all believe we're going to be in from a valuation perspective for the next 12 to 18 months. But from an M&A perspective, I think that's the case.

On the investments in the business, we are more likely to invest in product than anything else right now, but we’re not going to invest at a rate faster than our revenue is growing. As Bart said, in his comments, we expect our EBITDA margins actually rise as we move through the rest of the year. The Q1 will be low point, and we'll see an average for the year that is higher than Q1 and absolutely going to exit the year at an even level of EBITDA margin is higher than Q1 – our outlook for Q2 is about 0.5 to 3.25 improvement in EBITDA margin.

So when we say invest, we mean inside of growth that we're confident in, growth in both revenue and growth in profit for the full year, we've got an ability to add engineers that we need to, to build a new product or make a product better based on feedback we're getting from our customers. We're not in that position to look, you got to get rid of 10% of your workforce, it doesn't mean – it doesn't matter what your customers are saying. What I tell our global employee base is, my plan is no employee will go this year unless you're not doing your job, so do your job and let's grow in an environment where others can't.

[Matt Hedberg, RBC Capital Markets]

Great, best of luck.

[Kevin Thompson, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question is from Brent Thill of Jefferies. Please go ahead. Your line is open.

[Luv Sodha, Jefferies]

This is Luv Sodha on for Brent Thill. Just one for me. Can you guys remind us how your contracts with MSPs are structured? And what I mean by that is, are they based on annual or monthly contractual commitments or is this more of a page you go model-based on end-user demand, like something like the number of endpoints monitored month-to-month. Just a mix between those two would be helpful to see into that.

[Kevin Thompson, President and Chief Executive Officer]

Yes, it's kind of really all. So we have a number of MSP customers who have annual contracts, and some of those customers pay upfront. We've got a number of MSP customers that have annual contracts with minimum committed volumes but they pay monthly. And as they go over those minimum committed volumes and they pay more. But as a minimum committed volume, we're going to bill them for every month.

So we billed some of the customers at the beginning of the month based on those committed volumes. And then we also have a number of MSP customers that are simply on volume-based arrangements that are month-to-month, and we billed at the end of each month based on the level of volume of our technology that they're using. And from a trend perspective, we saw an increase in the number of devices, MSPs are managing in March. We saw that kind of settle out in the month of April, but we're not seeing a decrease in the number of devices that our MSP customers are managing. So it's really a combination of all.

A meaningful percentage around middle and annual commitments, but most of those on annual commitments are on monthly billings, but they're contractually committed for a year.

[Luv Sodha, Jefferies]

Okay, thank you.

[Kevin Thompson, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question is from Terry Tillman of SunTrust. Please go ahead. Your line is open.

[Nick Negulic, SunTrust]

Hi, guys. This is actually Nick on for Terry. Thanks for taking our question. I was just hoping you guys could provide a bit like an update on one of the go-to-market initiatives you had mentioned actually at your Analyst Day last year around deploying customer success managers.

I think that was focused more so on on-premise products, but have you been seeing a soft return on this initiative so far or at least pre-COVID? And do you plan to continue to build out that motion going forward? Or what are the plans there?

[Kevin Thompson, President and Chief Executive Officer]

Yes. We absolutely plan to continue to focus on that initiative, and we'll continue to add customer success managers as we move through the year. We have added some already that was initiated to kick off early this year. So really a little too early to tell you what impact that they're having, but I will say that the little confidence in my team is that initiative is going to be an important one, that it will, over time, drive customer retention rates up, net retention and renewal rates up.

And the early indications of our customers that we're touching with that motion are more likely to buy more technology faster and then their renewal rates are higher. So early returns look solid, but it's too early to tell. We just started investing in it but we will continue to invest in that initiative. And it really is across the business. Yes, we've added that for our on-premise products that we never had it before. But we also have increased the level of investment we have in customer success managers in our MSP business, where we believe by doing that, we will be able to build stronger relationships with our MSPs, which would result in higher both growth and net retention.

[Nick Negulic, SunTrust]

Got it. Thanks guys.

[Kevin Thompson, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question is from Sanjit Singh of Morgan Stanley. Please go ahead. Your line is open.

[Sanjit Singh, Morgan Stanley]

Hi, thank you for taking the questions. And hope everyone in Austin is safe and healthy. There were some many impressive things about Q1. But I think sort of big picture, the sort of investor debate is around the SMB exposure. And I was wondering, Kevin, if you can give us a sense of how much of your revenue is coming from customers that would really qualify as small business versus medium, midsized businesses or enterprise, just to sort of contextualize a little bit of where your revenue dollars sort of come from?

And then when you do have churn, is it churn from companies going out of business or getting acquired? Or is it coming from – does it come from like down sells? Any context there that would be really helpful.

[Kevin Thompson, President and Chief Executive Officer]

Sure. Yes, so we – maybe to provide a little bit of context. So if you remember if you've been following this for a long time, when we attack the market opportunity, we're not attacking the market opportunity necessarily at a company level, we're taking the market opportunity at a buying department level, which means even inside of companies, large companies have 50 to 60 buying locations around the world. We're attacking at those levels.

As a result of that, we don't set our CRM systems up to really identify are you a small business customer or a large business customer now. With that being said, we have some level of knowledge because we can look at the product the customer is buying in the size product they're buying. That's still not a perfect indication of look, GM could buy the smallest version of NPM and use it in one of their plants. But yet it's GM, so it's not a perfect proxy size product, size of customer. So we don't have exact numbers, which is why we don't talk about that. What we have said is that the majority of our customers would probably fit into that mid-market, small business category means kind of a hundred employees, still a couple of thousand employees.

The majority of our revenue dollars, however, are coming from the minority of our customers, which are absolutely small enterprise to large enterprise. So while we've got some level of exposure to the SMB market, and we definitely do we know companies like Atlassian do because we have really powerful models that allow us to reach the entire market, which is really great. So we do have exposures, have got more customers by far than almost any other company in enterprise software that we can be with and probably take most of my competitors together, add older customers together, we've got more than that.

So we absolutely have a large number of small business customers. But I would say the level of exposure that is distributed across a lot – in a lot of companies, also keep in mind, if you're buying our products and you're a small business customer, it means you're relatively sophisticated. You've got a technology environment that matters. So if you're like my level, most of you know, I own a little athletic training center on the side, we're not buying someone’s products to manage our own environment.

We use MSP. And I didn't generate any revenue in that business in the month of April, we were shut down. And I didn't change by $0.01 the amount of money I pay by MSP because I knew I was going to open back up and I needed my systems running or I couldn't open back up.

So I think our exposure really in the SMB market is around – do a bunch of SMBs, go out of business but then are those SMBs that are buying technology from us, it's not the mom and pop grocery store that's got one location that is even buying services for our MSPs. If the person who has four or five little smaller grocery stores or five or six pawnshops that is buying from us. And those businesses will be the ones that survive as we move through this environment.

So we've absolutely assumed that our outlook that we're going to see some attrition of customers because they're going to simply cease to exist. We think if they stay in business, they're going to continue to be our customers. Maybe their level of usage is there an MSP customer drops a little, but we don't think they go away. And the trends we've seen so far would say that – I think nobody know would expect a lot of companies that have gone out of business already. We're definitely not seeing that.

And we haven't seen the level of usage starts to drop either, but we have built into our outlook for the rest of the year. We'll see some of that. So we are assuming really across the market, we're going to see some of that pressure, but that's kind of how we think about it.

[Sanjit Singh, Morgan Stanley]

That’s great context. And then as a follow-up, as we all sort of think about what the world looks like sort of coming out of this, you sort of addressed part of that in sort of your commentary around the opportunity to consolidate, particularly on the on-prem side because that's you're the only vendor in the space that's sort of investing there.

The other sort of takes that we're hearing more and more is that this is a force multiplier for companies accelerating their cloud, cloud road maps, cloud initiatives. I was wondering, one, if you agree with that? And then two, to what extent does that present risk or an opportunity to accelerate or sustain sort of top line growth if we're going to – if companies are going to move faster to cloud that they have been in the last five years.

[Kevin Thompson, President and Chief Executive Officer]

So I'll answer the second part of the very question versus the first part of the question second. So let's just say what we see is an acceleration in the rate at which we see companies moving technology to cloud-based, SaaS based deployment models that will accelerate this move to hybrid IT we've been talking about the last year and a half. And that seeing acceleration of the move to hybrid IT, I think will be an opportunity for us. We have an ability to cover hybrid IT restructured away that others cannot.

And so I do believe that's going to be an opportunity, and we'd actually welcome that move to more of a hybrid IT world with recognition, which has really come in this environment. There's different things you got to think about in terms of how you manage in a hybrid IT infrastructure then – and when people work remotely than maybe you were thinking about before. So I think that is absolutely a growth opportunity when it happens because I don't think if it's a win.

Now do I think this environment is going to accelerate that, I don't really. I'd be happy if it did, but it's not what I think could happen at least in the next six months. I think in the next six months, you're going to see IT organization kind of retrench back into, I have to make sure my infrastructure is really secure and highly available and really fast. And I have to make sure that all those things exist no matter where the user happens to sit, no one would ready for what we just went through, right. No one was ready to send all their people home. And anyone who said they were completely ready, they're just lying because no one was completely ready.

And so IT teams now are dealing with that. They managed to survive through just brute force over the last seven weeks. They're going to spend the next six months going from brute force to a whole lot of elegance in terms of way they manage those environments. Then I think they may lift their heads up and say, okay, where do I want to have technology deployed in order to make this even easier than what I've already done.

So I think that's what we're going to see. So I don't think it will be a delayed acceleration if there is one this year because they're just not budget to do that. And that you don't save enough money in this year to actually pay for the work that you've got to do. Those savings will come over a period of time. And a lot of companies are focused on cash right now, know what future economic benefit might look like.

[Bart Kalsu, Chief Financial Officer]

Sure. We have time for one more question, operator.

[Operator]

Thank you. Your last question is from Kirk Materne of Evercore. Please go ahead. Your line is open.

[Kirk Materne, Evercore]

Okay. Thanks for squeezing me in. Kevin, just if we think back to sort of 2008, 2009 and sort of the last time we went through something somewhat similar. When you look at pipeline then in terms of just the number of RFPs versus say the ASP associated with them, I guess we use like ARR in this go-round. I just sort of streamline it.

I guess, what happened in those days. Meaning did you have lower – smaller deals from a dollar perspective in more pipeline. I guess, what are you seeing today? Is it somewhat similar? Is it different? You obviously have a much broader product portfolio too. So just kind of curious how you think about those, and what your plan is around that, I know you touched on a little bit about – why don’t you dive into it a little bit…

[Kevin Thompson, President and Chief Executive Officer]

Yes, I think we're a very different company with a very different set of capabilities inside of our product portfolio, many of which those products addressed. It's existed back in 2008, 2009 but the level of capability, level of ability to scale of that product portfolio is greatly different. So in 2008, 2009 there weren't a lot of people calling us to consolidate their IT organizations around our products.

We're getting a lot of inbound interest because budget's been cut. They were looking for ways to just reduce small amounts of costs, so they were buying our products, deploying them to manage departments and locations. They were reducing the usage of their big framework products that they used to use at that point in time. Today it's definitely different. Today we are the one vendor who's continued to invest in managing that on-premise environment.

Also in really investing and managing that hybrid environment and not just the cloud environment where a lot of the newer players are today and so the ASPs of the opportunities that come in through RFP are much, much larger than anything we have ever seen back in 2007, 2008, 2009. Now I think what we'll see over the next nine to 12 months and we'll say ASPs go up as we win more and more of those deals that's already happening. And we grew by 22%, the number of large customers we added in the first quarter. So we've seen very nice growth in building those large customer relationships because of the scale and complexity that our product portfolios deal with and handle.

So right now, I'd say we're getting more of those larger opportunities where people are coming and saying, hey, I need to save that $30,000, $40,000 I need to save $200,000, $300,000. So I think you're going to see bigger ASPs as a result of these consolidation conversations than what we might've seen in the past.

[Kirk Materne, Evercore]

And just I guess final one for me. Do those consolidation questions include sort of the newer sort of best of breed vendors in the cloud that weren't around obviously in 2008, 2009 or are those – are you seeing, customers ask you to help out on that front as well or is it still mainly more the legacy on-prem folks that you're consolidating spend away from…

[Kevin Thompson, President and Chief Executive Officer]

It is more of the legacy on-prem folks that were getting this discussion around right now because we're so much less expensive than they are and we're better and we address the hybrid world in a way they don’t. So customers have the issue as they're paying too much and they're blind to part of their environment. We can save a lot of money and we can make them be able to see which the other guys can't do.

We are planning, however and I talked about on the call, we are being really aggressive from a pricing perspective across infrastructure, applications and log management. From a cloud perspective, we are running campaigns and programs and pricing initiatives that have reduced our already low prices by another 50%. So I do think, we will be able to get those environments into that consolidation conversation because we're going to be able to do it at such a low cost and we'll be able to give connected visibility.

So we're going to take advantage, as I said of this environment. But you got to make as many positives out of a negative as you can. And I do think we've got an opportunity to take share both in the markets where we're already a leading market share player or the leading player when it comes to network management, but also in those areas of the market where we're not a leading player, I think we're going to have an opportunity to start to create market share gains. And we might not have had over the next six to nine months if we hadn't seen a difficult environment. So we're going to make some positives out of it. We'll see how much traction we could drive, but I think we will drive some.

[Kirk Materne, Evercore]

Okay, thanks Kevin. Stay well.

[Kevin Thompson, President and Chief Executive Officer]

Thanks a lot, operator. With that, I think we're done.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.