SolarWinds Corp

NYSE:SWI

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon, my name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the SolarWinds' Third Quarter 2010 Earnings Call. [Operator Instructions] I will now turn the call over to Dave Hafner, Head of Investor Relations. You may begin your conference.

[David Hafner, executive]

Thank you, Mike. Good afternoon, everyone, and welcome to SolarWinds' Third Quarter 2018 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. Please remember that certain statements made during this call, including those concerning our financial outlook, our expectations regarding growth and profitability, our market opportunities and market share, areas of focus for our business and our product plans and releases are forward-looking statements. These statements are subject to a number of risks, uncertainties and assumptions described in our SEC filings, including the risk factors discussed in our final prospectus dated October 18, 2018 and filed with the SEC on October 22, 2018, pursuant to the Rule 424B of the Securities Act of 1933 as amended in the Form 10-Q that we anticipate filing on or before December 3, 2018. 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. In addition, some of the numbers during this call will be presented on a non-GAAP basis. This includes references to non-GAAP revenue. When discussing revenue on today's call, we'll be referring exclusively to non-GAAP revenue, our use of non-GAAP revenue reflects our adjustments to GAAP revenue for the purchase accounting-related impact to revenue following our take-private transaction in February 2016. 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 will provide today has not been reconciled with 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.

[Kevin Thompson, executive]

Thanks, Dave, and thanks to everyone joining us for our first earnings call since our return to the public markets following our IPO on October 19, 2018. We're pleased to announce a great start to our second journey as a public company. Our results for the third quarter exceeded our preliminary results in our final prospectus as we delivered $214 million in total non-GAAP revenue and adjusted EBITDA of over $106 million, which reflects a 49.8% adjusted EBITDA margin for the third quarter. We saw a solid growth across each of our revenue streams in the third quarter with our non-GAAP license and maintenance revenue growing at 8%, driven by license growth of 8%, which is the strongest quarterly license rev we've seen since our take-private in 2016. Our non-GAAP subscription revenue increased by 22% and total non-GAAP revenue grew by 12%. Our third quarter results illustrate the continued momentum we have seen in each of the first 3 quarters of 2018 in our license and maintenance product lines as we've accelerated the rate at which we are taking share in the on-premise IT management market. This has resulted from our ongoing investment in this product portfolio and the extension of the capabilities of our on-premise products to manage public cloud IT infrastructure and applications. Our subscription revenue is comprised of revenues from the sales of our MSP products, and our cloud management products. In the third quarter, we saw solid growth from both of these product lines, driven by strong customer growth in MSP, and by the breadth of the capabilities we've rapidly developed in providing cloud-to-cloud management solutions. While we remain true to the pillars of the SolarWinds model, which have allowed us to build a fast growing and highly profitable business, we took advantage of the opportunity we had as a private company over the last 2.5 years to rapidly and meaningfully improve our business. We think our strong third quarter results do a great job of illustrating the progress we've made significantly expanding our market opportunity by extending the SolarWinds brand more deeply into the MSP market and through building a portfolio of leading products to help technology partners manage cloud-based and hybrid IT infrastructure and application environments. We also have continued to invest in our on-premise network and systems management business, allowing us to gain additional market share. We moved into the #1 position in network management in 2017 and extended our lead in 2018. We have assumed the #4 position in systems management, moved into the leading position in Remote Monitoring and Management Market for MSPs, and in addition, we have created a strong presence in public cloud management.

We managed to do all of this, while meaningfully increasing our level of non-GAAP profitability as measured by our adjusted EBITDA margin, which is at 48.1% for the first 9 months of 2018. We had 3 big goals when we went private in early 2016.

First, we wanted to position the company and our technology portfolio to take advantage of the hybrid IT infrastructure world we anticipated was coming. We believed back in 2016 and continue to believe today that organizations will deploy IT infrastructure in different locations, including on-premise, in the private cloud, in hosted data centers and in the public cloud. Technical parameters are constantly solving for 3 variables: cost, performance and security, as they make these decisions. Over the last 3 years, we've worked to create the broadest and deepest set of hybrid IT infrastructure management products in the market to provide technology parameters with the capabilities they need to manage their IT infrastructure whether their infrastructure is deployed on-premise, in the private cloud, in hosted data centers, in the public cloud or on all 4 of these locations which is what is most likely in today's IT environment. In addition, we now provide technology parameters with the ability to choose what location these environments are best managed from. We've extended the capabilities of our key network and systems management on-premise products to manage the public cloud, providing our customers with a single view of their hybrid IT environments across all public cloud providers.

In addition, we have developed a comprehensive set of cloud-based products that developers, dev ops players and IT ops players can use to manage their native cloud infrastructure and applications, which we have leveraged to rapidly build what we expect to be a $50 million ARR subscription revenue stream in public cloud management by the end of 2018. Second, based on feedback from the over 150,000 registered members of our user community FLAC, is that I believe for many years that the rapid pace of change in technology would drive small businesses all around the world to look for more help managing the performance of their IT infrastructures. It was our view that these small businesses would turn to managed service providers in ever increasing numbers to handle these issues for them. We made our initial investment in the MSP market through the acquisition of N-able in 2013. At that time, only approximately 17% of small businesses were using MSPs to manage their IT environment for them. Fast-forward to today, and over 45% of SMBs are using an MSP to manage all or part of their IT infrastructure. We doubled down on our investment in the MSP market only a few months after the take-private through the acquisition of LOGICnow in May 2016, which gave us a fully cloud-based broad set of products to attack the rapidly growing SMB market through the MSP channel. We've now created a highly profitable and fast growing subscription revenue stream in the MSP market, which we expect to be an over $225 million ARR revenue stream by the end of 2018 at the midpoint of the guidance that Bart will provide in his comments. Third, we had a unique and powerful financial model in 2016. However, we believe we can make our financial model more powerful and more predictable. Over the last 3 years, we've increased our subscription revenue from less than $60 million ARR to over $270 million of ARR as of the end of third quarter 2018. We've done this by adding new subscription-based cloud and hybrid IT management products and by increasing our investment in the MSP market. It is important to note that we have not transitioned any of our historical license and maintenance products to a subscription model. The rapid growth in our subscription revenue stream has been driven by new products and new customers. Our license and maintenance customers continue to want to buy our on-premise products, leveraging their access to a capital budget. Today, over 80% of our total revenue is recurring, and we expect that percentage to continue to grow and sales of our subscription-based products are the fastest-growing portion of our business. In fact in the 9 months ended September 30, 2018, non-GAAP subscription revenue represented almost 1/3 of total non-GAAP revenue.

Pulling high profitability on a non-GAAP basis is part of the SolarWinds DNA. Our quarterly result illustrate the operating leverage and efficiencies our business runs on. In fact today, we are even more profitable than we were when our take-private was announced in the fall of 2015. For the 9 months ended September 30, 2018, adjusted EBITDA margins were 48.1% and non-GAAP operating margins were 46%. We've increased our adjusted EBITDA margins by over 3 percentage points in the last 3 years, all the while investing in new products and new markets, which, we believe, has more than doubled our total addressable market opportunity. And over the same period of time, we've built a large SaaS-based subscription revenue stream. For those of you who knew us as a public company before the 2016 take-private, you will recall that we often talked about SolarWinds' model. In hindsight, we think that the SolarWinds model is generally not fully appreciated and was viewed by some as being only a software model that employed digital marketing and an inside sales team for selling low-priced IT management products to small businesses. That view of SolarWinds is definitely not a complete one. In its totality, the SolarWinds model is an interconnected system that all starts with our product. We build great products. SolarWinds' products are a critical ingredient in the secret sauce recipe for our model and turn our success into the market leadership positions we've achieved. Our products are designed with the needs of technology parameters who use our products every day in mind. Our products are built to solve the problems faced by technology pros where and when they want these problems to be solved. Our products are designed to be the best solution in the market in addressing the IT management challenges faced by today's technology professionals. In addition, we are not and never have been the company focused on only serving the SMB market. We've created a technology portfolio and a go-to-market mission that has allowed us to serve the entire market from very small companies that have IT infrastructures that are important enough they need to be managed to the largest companies in the world. In fact, 499 of the Fortune 500 are currently customers of ours and many of them have become sizeable customers. As a proof point that not only are we able to effectively serve small businesses but that we also have created long relationship with very large companies over the trailing 12 months ended September 30, 2018, we had over 695 companies spend over $100,000 or more with us. We have the quintessential land and expand model, we generally start with a small financial relationship of less than $10,000 as the tech pro finds, tries and buys one of our products to allow them to solve an urgent problem that has their gut on fire. Then as these tech pros have success with our products, they become our evangelist and advocate inside the customer, driving expanded use of our product. This vital land and expand approach has resulted in and continues to result in the development of a meaningful number of very large customer relationships. When surrounded by the other key principles of our business, affordable and disruptor price points, our deep connection to our user community, products specifically built to meet the needs of technology pros and organizations of all sizes, the efficient go-to-market motion based on digital marketing and selling from the inside, which allows us to reach the entire market, the momentum we have in the market and the strength of our global team, we believe we have a solid foundation upon which to deliver sustainable long-term growth at a very high level of profit and cash flow generation. While we have continued to make meaningful investments in our existing products, we also are rapidly bringing new products to market that solve today's evolving IT management challenges in a way that our users want them solved. This year, we've released a number of exciting new products that extend our capabilities across our on-premise IT infrastructure, public clouds management and MSP product lines that I will talk about briefly before turning it over to Bart, who will walk you through the details of our financial results. While we see data as a rich source of information technology professionals harness to allow them to identify, understand and address the performance challenges in IT environments and applications. Unfortunately, the high cost and complexity of existing enterprise log management solutions often put these products out of reach for many companies both big and small. We believe our early Q3 release of Log Manager for Orion changes that with an easy to use product that is designed so that it doesn't require professional services to implement and an easy to understand pricing model, with a disruptive entry price point of $1,495, Log Manager makes true enterprise class log management accessible to companies of all sizes, allowing users to aggregate, search and chart log data. Log Manager also sits on our Orion platform. The foundation for many of our flagship products, including network performance monitor, server and application monitor and database performance analyzer giving our users a unified view of network and systems performance. But any good IT pro will tell you and our customers are great IT professionals, logs are just one way to determine what's going on within a system. When something goes wrong, a user's first question is what changed in my environment? SolarWinds' Server Configuration Monitor, which was released at the end of the third quarter, answers that key question by allowing IT pros to quickly zero in on system and application changes, identify when they occurred, where they occurred and trace those changes back to the performance issues. Server Configuration Monitor also allows IT ops teams to proactively monitor and receive alerts on system changes and correlate changes to performance over time. SCM is also built on the Orion platform as we continue to make it easy for IT pros to implement and use multiple products in SolarWinds that are fully integrated out of the box. Like all of our products, SCM is designed to be affordable, starting at only $1,750. Also in the third quarter, our MSP business launched the latest version of SolarWinds N-Central, with a wide range of features including deeper PSA application integration, enhanced patch management and Net Path. Net Path is a great example of how we're building our product to allow them to be utilized across each of our product lines. Net Path was originally developed as an important feature for one of our key network management products, SolarWinds' Network Performance Monitor. It is now an integrated offering on our MSP platforms. Net Path is designed to help users troubleshoot network performance issues by providing deeper visibility into network path, application response time and non-performance for on-premises, hybrids and cloud environments. MSPs can pinpoint slowdowns, outages and other problems through a visual depiction of every hot traffic case, from the end-user to the network to the applications being accessed and back. When a problem is found, Net Path presents relevant network statistics and contact information for the affected node, giving businesses the opportunity to quickly alert other providers to help get the service restored quickly. Last, we very recently launched SolarWinds' Application Performance Monitor, which extends the application monitoring capabilities as SolarWinds' sovereign application monitor, our flagship deployed on-premise systems management product. Based on the capabilities of AppOptics, our cloud-based application management product, Application Performance Monitor provides deeper visibility into the health and performance of custom applications, both on-premise and in the private and public cloud using distributed tracing. We developed SolarWinds' APM in response to the findings of a survey of SAM users completed earlier this year. This survey reveals that 90% of the respondents had at least 1 custom application in their environment, and wanted the capabilities such as transaction tracing to help improve their ability to successfully monitor those applications. Respondents highlighted another key aspect that their #1 priority was to be able to utilize a solution that integrated well with SolarWinds' SAM. As you can see our product organization has been very busy this year, as we've developed and released and a record number of new products. We believe we currently have the most comprehensive product portfolio in IT management and a user-centric product strategy that gives us tremendous competitive advantage in the market. Looking forward, we plan to bring additional new products to market while enhancing our existing products, provide us with the ability to drive and sustain long-term growth. With that, I will turn the call over to Bart, who will walk you through the details behind our third quarter financial results as well as our outlook for the fourth quarter and a preview of 2019. I'll then wrap up some additional thoughts before we take your questions.

[J. Kalsu, executive]

Thanks Kevin and thanks again to everyone for joining us on today's call. Our third quarter financial results reflect strong execution in all areas of our business while demonstrating the leverage that we have in our model. Total non-GAAP revenue for the third quarter was $214 million, reflecting year over year growth of 12%. Total non-GAAP revenue for the 9 months ended September 30, 2018 was $615.2 million, which is a 14% increase over the prior year amount of $541.2 million. We also had a very strong quarter of non-GAAP profitability and cash flow generation.

Third quarter adjusted EBITDA was $106.5 million, representing an adjusted EBITDA margin of 49.8%, and for the 9 months ended September 30, 2018, adjusted EBITDA was to $295.7 million, representing an adjusted EBITDA margin of 48.1%. Cash flow from operations was $166.1 million, which was a 22% increase over the prior year amount. In addition, we continued to convert a high percentage of our adjusted EBITDA into cash flow. Third quarter unlevered free cash flow was $86.5 million, which contributed to unlevered free cash flow of $259.7 million for the 9 months ended September 30, 2018, which was up 18% year over year and represents 88% of adjusted EBITDA. Our revenue model continues to show a high level of predictability with a high percentage of recurring revenue that gives us greater visibility into future periods.

Digging into our revenue results, non-GAAP license and maintenance revenue increased 8% year-over-year to $146.1 million for the 9 months ended September 30, 2018. That growth was driven by a combination of growth in license sales across our license-based on-premise IT management products and strong results from the key regions in which we operate coupled with strong renewal rates. Our high maintenance renewal rates highlight the value of our products and the loyalty of our large on-premise customer base. Our maintenance revenue growth also highlights the power of our unique product and maintenance pricing model, whereby we recognized approximately 40% of the initial license value as maintenance revenue in the first year. Overall, we are pleased with the performance of our on-premise IT management business in 2018.

We saw good momentum in our international and North America regions and non-GAAP license revenue increased 8% year-over-year in the third quarter to $43.7 million. Non-GAAP license revenue has increased 5% during the first 3 quarters of 2018 compared to the same period in 2017. We believe that a large driver of the improvement we have seen in license revenue performance during the first 9 months of 2018 is primarily the result of having a tenured sales and marketing leadership team that have established a higher level of focus on attacking the opportunity inside our customer base. Continuing with the overview of our third quarter revenue results, we also saw strong non-GAAP subscription revenue growth in the third quarter. Non-GAAP subscription revenue of $67.9 million in the third quarter represented growth of 22% year-over-year. Within both our MSP and cloud management product lines, we continue to do a solid job of landing new customers while retaining existing customers and expanding their spend on our products. Our success at landing, expanding and retaining customers has translated into sequential increases in monthly recurring revenue and in addition, our subscription net retention is averaging 105% for the last 12 months.

Looking ahead, our focus will continue to be on adding new managed service providers, dev ops and IT professionals to our customer base and driving higher growth by introducing new products in both the MSP and cloud management markets with a focus on improving our net retention rate. As we discussed, we now have a very high percentage of recurring revenue compared to where our business stood at the time of our take-private transaction. When combining subscription and maintenance revenue, our total non-GAAP recurring revenue in the third quarter of 2018 grew 13.1% year-over-year and represented approximately 80% of total non-GAAP revenue, while total non-GAAP recurring revenue represented 81% of total non-GAAP revenue for the first 9 months ended September 30, 2018.

Non-GAAP expenses were at $112 million in the third quarter of 2018, which includes $94 million in non-GAAP operating expenses and approximately $18 million of non-GAAP cost of revenue expenses. For the 9 months ended September 30, 2018, total non-GAAP expenses were up 14% year-over-year, which is in line with total revenue growth, including an increase in general and administrative expenses as we prepared to once again be a public company and the investments we made to support the long-term growth in all areas of our business.

Looking forward, we expect to continue to seek to optimize our business to deliver best-in-class margins. We see the opportunity for greater operating leverage in many areas of our business, including our product development organization where we have made significant investments in recent years to expand and build upon or hybrid IT management capabilities. Before walking you through our outlook for the fourth quarter and full year, I want to briefly hit on our capital position following our IPO in October.

As we disclosed in our final prospectus and talked about during the roadshow, we used a portion of the $353 million of net proceeds from the Initial Public Offering to pay-off our second lien debt of $315 million, which means we now have less than $2 billion in first lien debt outstanding and the rate is currently at LIBOR plus 275. We will continue to monitor movements in interest rates and take advantage of refinancing opportunities, if advisable. Our net leverage ratio, given effects for the payoff of the second lien is at 4.2x our trailing 12 months adjusted EBITDA and we expect that ratio will continue to decline through continued growth in our adjusted EBITDA and cash flow in the fourth quarter, and therefore, we expect to be closer to 4x by the end of the year.

I will now walk you through our outlook before turning it over to Kevin for some final thoughts. Based on our strong performance this year through the third quarter, we are providing the following guidance related to our fourth quarter and for the full year as follows. I will start with fourth quarter guidance: For the fourth quarter, we expect total non-GAAP revenue to be in the range of $218 million to $220 million, representing year-over-year growth of 9% to 10%. Our expected growth rate would be approximately 1% higher on a constant currency basis. Total non-GAAP license and maintenance revenue is expected to be in the range of $149 million to $150.5 million, representing year-over-year growth of 5.6% to 6.6%. Non-GAAP subscription revenue is expected to be $69 million to $69.5 million, representing growth of 17.7% to 18.5%. Adjusted EBITDA is expected to be $107.8 million to $108.9 million, representing an adjusted EBITDA margin of 49.4% to 49.5%. Non-GAAP fully diluted earnings per share is expected to be between $0.17 and $0.18 per share, assuming an estimated $320.5 million pro forma fully diluted shares outstanding for the full quarter. Our guidance for the fourth quarter assumes a non-GAAP tax rate of 21% but we only expect to pay approximately $3 million in cash taxes during the fourth quarter. And lastly, our fourth quarter guidance assumes a euro-to-dollar exchange rate of 1.14.

Our guidance as it relates to the full year is as follows: We expect total non-GAAP revenue to be in the range of $833.2 million to $835.2 million, representing growth of 12.4% to 12.7%. Total non-GAAP license and maintenance revenue is expected to be in the range of $567.1 million to $568.6 million, representing growth of 7.9% to 8.1%. Non-GAAP subscription revenue is expected to be $266.1 million to $266.6 million, representing growth of 23.7% to 23.9%. Adjusted EBITDA is expected to be $403.5 million to $404.6 million, representing an adjusted EBITDA margin of 48.4%, and non-GAAP fully diluted earnings per share is expected to be $0.57 to $0.58 per share, assuming an estimated $320.2 million shares outstanding for the full quarter. Unlevered free cash flow as a percentage of adjusted EBITDA is expected to finish in the high 80% range for the year. And finally, given the timing of our Initial Public Offering in today's earnings call, we wanted to give an initial high level view of our current expectations for 2019 total revenue and adjusted EBITDA. Despite not having completed the year, in the future you should not expect us to provide forward-year expectations on our third quarter earnings call. We expect total non-GAAP revenue for the full-year 2019 to be in the range of $918 million to $933 million, representing growth of 10% to 12% versus the midpoint of our full-year 2018 total revenue guidance of $834.2 million. This also assumes the same 1.14 euro-to-U.S. dollar exchange rate we used in determining our fourth quarter 2018 revenue expectations. We also expect a 25 to 30 basis point improvement in full-year adjusted EBITDA margins in 2019, as compared to expected 2018 full-year adjusted EBITDA margin of 48.4%. We will provide a more detailed view of our expectations for 2019 performance on our year-end 2018 earnings call, which we expect to have in early February 2019.

I will now turn the call back over to Kevin.

[Kevin Thompson, executive]

Thanks, Bart. As you can tell from our discussion, we've been busy the last several years expanding, scaling and strengthening our business. We have emerged in new markets, developed new products and made a strong financial model even stronger. We believe we have assembled a set of technologies that will allow us to take advantage of the areas of growth in IT infrastructure, such as public cloud and hybrid IT, while meaningfully increasing our market share in on-premise, private data center and hosted data center IT infrastructure management as well as the MSP market. We believe we have positioned SolarWinds as the center of today's IT infrastructure environment, with the breadth and depth of technology coverage that no other vendor can match.

We also believe that we have demonstrated our ability to enter new IT infrastructure markets and successfully use our unique approach to building, marketing and selling technology to create a market-leading position. So while we believe there remains a tremendous growth and profit opportunity in the IT infrastructure management markets where we compete today and we will continue to apply a tremendous level of effort and focus to deliver that growth and profit, we also expect to continue to expand into new IT infrastructure markets. In fact, we've been searching for the right opportunity to enter the infrastructure security market for several years, and in the third quarter, we identified that opportunity. We have set our sights on the vulnerability and threat monitoring portion of the security market and we are pleased to announce our entrance into the infrastructure security market with the release of SolarWinds Threat Monitor during the third quarter of 2018. Threat Monitor allows our users to monitor, respond to and report security threats through continuously updated threat intelligence data, log correlation and network and host intrusion detection. Unlike other areas of security such as antivirus which we view as already commoditized, the vulnerability management market is right for our model, given the high cost and complexity of incumbent solutions. Threat Monitor is also a great example of a technology that we can sell and market to buyers across different parts of the IT and management arena and Threat Monitor comes in flavors for both IT ops team and managed security service providers or MSSPs.

In the fourth quarter, we have already begun the expansion of our infrastructure security portfolio through the launch of SolarWinds Access Rights Manager, adding management and auditing of user access rights to the SolarWinds' infrastructure security portfolio. Access Rights Manager is a key ingredient for all IT ops teams who need to understand and react to insider security threats. Access Rights Manager also delivers on SolarWinds' promise of making IT easy, with an easy to use intuitive user interface and workflows that make the day-to-day task of user provisioning and management much more simple. A unique and defensible model, large scale, strong visibility, solid growth, differentiated non-GAAP profitability and a high conversion rate of adjusted EBITDA to unlever free cash flow, coupled with an estimated $67 billion annual recurring revenue addressable market opportunity that is leveraged to the key fast growing markets within IT management and IT infrastructure, that's SolarWinds today. We hope that you will join us in the next leg of the journey in building a great software company.

With that, we will open up the call for questions.

[Operator]

[Operator Instructions] Your first question is coming from Heather Bellini from Goldman Sachs.

[Heather Bellini, analyst]

I have 2 questions. Kevin, you said that in the past that you want people to think about SolarWinds as more than just an SMB-focused vendor, and obviously you already have penetrated 499 of the Fortune 500, so you've demonstrated your ability to get into the high end of the market. But I'm just wondering if you can provide any comment on large deals that might have occurred during the quarter? And then the other question I had was if you take -- if you look at the outlook for your MSP business, how do you see adoption evolving here? And how do you view the competitive landscape?

[Kevin Thompson, executive]

Sure. So [ there is ] the large deals in the quarter, Heather, I mentioned that we've done, we have got 697 customers over the last 12 months who spent over $100,000 with us. We think we're averaging about 175 customers a quarter that are doing transactions with us for over $100,000 and that's been relatively consistently growing over the last 2 or 3 years, and we've been growing up the number of transactions we're doing in kind of that trailing 12-month period by kind of that 8% to 9% for a while now. I think you should continue to expect us to do that and it's really driven by the thousands and thousands of customer relationships we have. We have over 275,000 customers around the world, many of those have been customers for a while now. We began those relationships as very, very small but we've built a number of multimillion-dollar relationships with large companies and mid-sized companies for that matter, who have a high dependence on technology over the last number of years. So we've been averaging for the last 4 quarters about 175 deals over $100,000 and I think you should expect that, that number will continue to grow at a kind of mid-to-high single digit rate as we move forward.

As it relates to the MSP market, I think what we've seen is a really rapid move from SMBs trying to manage their own environment to asking MSPs to help them manage, at least a part if not all, of their environment and I think that will continue. About 45% of SMBs today are using MSPs. My view is ultimately we're going to end up with 70% or 75% of SMBs that are asking MSPs to manage all or a part of their environment and it will only be those small businesses where technology is really the lifeblood of their business that's going to want to continue to do that on their own. So we believe there is still a lot of growth opportunity in that market. You should expect us to not only continue to add new customers to expand our relationships with those customers, but also to look for opportunities to bring new solutions to market that we can put on our MSP product platform to provide to those MSPs so as they can provide those through to their SMBs. As Bart said, we're really focused on driving an improvement in our net retention rates which are good. We just happen to think they can get better over time and that's true for not only the cloud management market, but it's also true for the MSP market.

[Operator]

Your next question comes from Sterling Auty with JPMorgan.

[Sterling Auty, analyst]

So you talked about adding north of 6,000 customers a quarter for like the last 8 quarters, how was the new customer acquisition this quarter? And how much of that was coming through the MSP versus through [ the channel, ] direct relationships?

[Kevin Thompson, executive]

Yes, once again we added over 6,000 new customers in the third quarter. So we continued that trend now 9 quarters -- over the last 9 quarters, we've added 6,000 or more customers, and we added over 6,000 customers in the third quarter. We haven't broken down how many are MSP versus cloud versus core IT. So I won't answer that part of the question, but we continue to add a very consistent number of new customers, and honestly, it's a very large number of new customers we're adding on a quarterly and annual basis.

[Sterling Auty, analyst]

And one follow up, I get the repeating question your margins are really good. You're still calling for expansion, where do you think the bulk of the additional leverage will come from?

[Kevin Thompson, executive]

Yes, so leverage comes from really 2 places. Bart mentioned that we think we'll get additional leverage out of product development because we've invested very aggressively over the last 3 years in building our hybrid IT infrastructure management capability and specifically, our cloud, the cloud management capabilities. So we've spent, so a much higher percentage of revenue in that part of our business than we do across the rest of the business and as the revenue stream there grows and because we have now developed a really comprehensive set of capabilities, you'll see the R&D expense in that line as a percentage of revenue begin to drop. That is one area it will come from. We also believe that we'll see continued leverage, if you look at the global business itself, in marketing as we continue to drive this very high percentage of recurring revenue from over 80% to higher than that over time. And because our retention rates are so high and we developed very low-cost retention model, that also will provide incremental leverage.

And then lastly, if we get it, it will be a relatively small amount is we do think our gross margins can expand a little as we move forward because our cloud management products are at this point not close to the overall corporate average of over 90%. And it is our goal and it is our view that we can get those cloud management products to kind of a 90% gross margin over time, so that's where you'll see that come from. It's going to come gradually. We are going to control the rate at which our EBITDA margins are expanding. We don't want to get out in front of ourselves. We don't want to set the bar too high to start because we know we have the ability to expand and we've shown that ability over the last 3 years. You'll see us manage that expansion so we give you that kind of 30 basis points a year. We're going to try to be pretty consistent about that for the next 4 to 5 years.

[Operator]

Your next question comes from Brad Zelnick from Crédit Suisse.

[Brad Zelnick, analyst]

I've got one for Kevin and one for Bart as well. For Kevin, we appreciate the preliminary look you've given us into 2019, that's really helpful. What drives your confidence? And maybe beyond just having more recurring revenue, how do you think about the predictability that you have today versus a few years ago? And what macro inputs do you have baked into that projection? And for Bart, can you talk about the opportunity to move MSP customers to annual billing terms? And the interest you're seeing from the market in doing so?

[Kevin Thompson, executive]

So in terms of -- because our, the way we look at our business and the level of predictability we believe we have, definitely a lot has been driven by the fact that over 80% of our revenue is recurring and that percentage is growing, also when you look inside of that recurring revenue stream Brad, all of that is being driven by our customers and relationships we've had where we've had a very consistent level of growth from the relationships with those customers across our product line for the last 2 to 3 years, so we have a very predictable view of how much our customer revenues are going to grow.

The -- so we've got a lot of confidence that what we think the base level of growth is going to be as we look at 2019, and that's what's included in the guidance that we provided. We've assumed -- Bart indicated we assumed the currency markets kind of stay where they are now so if currency moves up or down, that could have some impact on next year's total revenue. We have not assumed that the IT environment is better than it now. We've assumed that we're going to see a spending environment that is kind of where it is now or maybe it could be slightly moderated from where it is today. We have not assumed some type of recession which I know some people want to call for. That's why I try not to watch CNBC in the morning but I can't stop myself some days. So some days I can see the bulls and some days you get the bears but we have assumed kind of neutral case to a slightly less favorable spending environment than the one we find ourselves in today.

We've built a lot of very strong cohort that we believe in our customer base in 2018 as we have added new customers, we think we have added a healthier set of new customers in 2018, particularly in the MSP side of our business which is going to give us a higher level of growth as we move into 2019 and beyond. So we've got a lot of confidence in kind of our preliminary view of 2019. Obviously we will sharpen that view as we move through the end of the year and into early next year but we feel very good about that level performance for next year.

[J. Kalsu, executive]

And Brad, as far as the upfront billing on our subscription product, it's not just going to be with our MSP customers, our plan is to try to get both our MSP and our cloud products on longer terms than just monthly, which is what they currently are. And we probably won't see annual billing with our MSP customers, annual billing up front. We will gradually try to get our MSP customers to change some of their products over time, and it's really a focus for us in 2019. So it's not really anything that we can talk about at this point.

[Kevin Thompson, executive]

I think what we indicated is that our goal is to get kind of $12 million to $15 million more and up from billing out of our -- as we indicated we've got about $270 million ARRs subscription revenue stream as of the end of September. We're not trying to drive $30 million, $40 million, $50 million, $60 million or more from billing. We're trying to drive kind of low double-digit amount. We think that is very achievable, and hopefully, we can do better than that but we feel pretty confident, we can do at least that.

[Operator]

Your next question comes from John DiFucci from Jefferies.

[John DiFucci, analyst]

I'd like to get both Kevin's and Bart's perspective on this question. Kevin, you said you could make this model even more powerful and more predictable. And certainly it's a powerful model. The predictability has been not always great in the past. But the greater the ratable mix, which is the difference right now this time around, the easier it is to do that on the top line. But what about the bottom line? And the reason why I ask is it is a little bit lower than we, and I think, The Street modeled for fourth quarter EPS, your forecast, any little bit light on this quarter's operating cash flow? Did we just model it incorrectly or was there a specific decision to invest a little bit more than expected or are you seeing something we didn't consider previously?

[Kevin Thompson, executive]

So I think the bottom line for us have been incredibly predictable over the last 13 years I've been here. We've never missed a bottom line number, we've always met or exceeded that number. And in fact, I think we've always exceeded that number over the last 12 or 13 years. So we're going to manage really whatever numbers we choose to manage to for the quarter. What we've done for the fourth quarter is really look at where we are for the year from an EBITDA margin point of view. We're going to be at 48.4% EBITDA margin for the full year based on the fourth quarter EBITDA guidance we provided. We beat our expectations for the fourth quarter by a lot...

[J. Kalsu, executive]

For the third quarter.

[Kevin Thompson, executive]

For the third quarter, I am sorry, by quite a lot. I'm sorry. And we didn't really have a desire to be honest to beat the 4 -- the full year by that much. We really wanted the full year to be around that 48.3% to 48.4% EBITDA margin and then we are going to get our 30 basis points of expansion really every year as we move forward. And we are going to really manage to that number. So you may see us beat a quarter. You may, which happens quite often. And then you are going to see us do our best to manage to that full-year target because that’s what gives us the confidence and the ability to commit to that expansion over a long period of time. So we wanted to be more thoughtful in the fourth quarter. We absolutely could be. I just don't want to be because then that's going to put us at above that 48.4% rate. It could put us meaningfully higher than that. Now what I will say is if we beat the fourth quarter revenue number, and that is obviously always our goal, then we are highly likely to beat the EBITDA number for the fourth quarter. Because as you saw with the third quarter when our revenue numbers are strong, our EBITDA margins are very strong and over 49% and EBITDA margin for the third quarter, which is a very, very high level for us.

And so really we’re simply managing to that full-year kind of 48.3%, 48.4% that we had targeted at the beginning the year. It is nothing more than that. So, we're going to choose to invest a little bit more in Q4 and hopefully that drives higher growth which if it ends us up in this vicious circle, will deliver a higher profit. But it is really just a conscious decision to not let the profit get too high too early. We’re trying to set a bar, as we begin this journey as a public company again that is one that we know we can drive and increase off of.

[J. Kalsu, executive]

Yes, John, I just want to reiterate what Kevin said, and that is we do manage to a full year number, but that being said, within any one quarter, if we do outperform on the revenue side, there is the opportunity for us to exceed adjusted EBITDA margin for that particular quarter. Kevin and I usually pretty prudent when it comes to allowing our managers to spend money. And we very rarely let them get ahead of us from a spend standpoint to put any -- to put adjusted EBITDA at risk in any one quarter. So there is the opportunity for us to beat if we do exceed on that top line. But at the end of the day, we're going to manage to a full year number and try to hit that number.

[Kevin Thompson, executive]

And from a cash flow perspective, what I'd say is that we were really are guiding to full year not quarters from a free cash flow perspective. Quarters are going to move around a little bit and so it’s really hard for both you and us to model specifically to [ any window ] but we’ve got a tremendous level of confidence in where we'll be for the full year and our conversion rate was at 88% in the third quarter. So we're already in the high-80s and our goal is to get that close -- get it to 90 over the relatively near future and we think we’re still on track to be able to convert our adjusted EBITDA and deliver free cash flow on an annual basis at that level. It will move around a little bit on a quarterly basis so we don’t try to play games in managing working capital. We don’t find that to be a productive use of time. And so we’re really confident that those conversion rates will be in that high-80 range for this year. And that they'll improve a little bit beyond that, as we move into 2019 through kind of 2021.

[John DiFucci, analyst]

That's all really helpful, and just more quick follow-up, and by the way, Bart, I really like that word prudent. Just 1 quick question for Kevin. Kevin you said, okay we're going to spend little bit more in the fourth quarter. Where would we expect to see that spend a little bit more? And it is just a little bit, I recognize that, it's [ just should we expect a bigger part... ]

[Kevin Thompson, executive]

Yes, so you should expect it to be primarily marketing and when Bart used the word prudent, we will spend it carefully, and I don't let them light it on fire and just to spend it so we if we spend it we expect to get a return on it, but that's really the only place that we can spend any extra funds in a short window of time because hiring people takes time and hiring people is a fixed cost. It stays with us forever and when we've got a little extra money we feel like we want to spend, we're going to spend it in a variable area where it doesn't move with us into the next quarter.

[Operator]

Your next question comes from Kirk Materne from Evercore ISI.

[S. Kirk Materne, analyst]

Welcome back to the public markets. Quick question for Kevin, third quarter for you guys has generally been a strong federal quarter. I was just curious if that helps add on sort of the license fees this quarter. And then secondly, one of the nuances I think you have added to the sales model this time around is to you add sort of a segment for installed base, call it the installed base and there's obviously a huge opportunity within that. So could you talk about maybe the fed and adding that installed base sales team? Does that help you go after that cross and up sell opportunity maybe a little bit more effectively than the last time you guys were public?

[Kevin Thompson, executive]

Yes, so it was right to settle. It is really no longer kind of a very large percentage of our business. It's still a good market for us. Remember we have a lot of success and we're able to do it in a way no one else can which is great. We do it in our model and we don't walk the halls and we don't have to pay lobbyists and all that kind of stuff so we had a good fed quarter. We had good international sales quarter. We had a good America sales quarter, so really all parts of our business contributed to the license performance that you saw in the third quarter. Really as Bart indicated, all of our key product and key regions performed at a high level and that's something we've been working to drive obviously for a long time now so we feel good about really all areas of the business and how they performed. On the [ other ] side, that continues to be a really good opportunity for us. We are driving now and it's one of the things also that gives us a higher level predictability in the business, you know over 50% of our license sales today come from our customer base, even on the license side. And obviously in our subscription business, the majority of revenue is coming from customer because that's the math.

But even in our license business today, well over 50% of our license sales come from our customers and today there is definitely a higher level of predictability in terms of the pattern in which those customers buy. We now have teams all around the world that are calling in to our customer base and it's actually our plan as we move into 2019 to increase the level of focus we have on selling into that very, very large opportunity we have. As you guys know, we have almost a $4 billion dollar opportunity to sell into our core on-premise customers, just the more of the core products that they don't own. And that's a very large opportunity that we're attacking. We want to get more of that each year and we're trying to drive our net retention rates up and the main way we're going to do that in our subscription business is to get our customers to buy more new functionality or use more of what they already have, so we're actually adding capability and focus even on our subscription products now to focus more on customer sales. So that's been a -- your real success right over the last 3 to 4 years and we're going to continue to increase the level of investment, as long as we see a return on that investment, meaning as long as we can do it at a profitable level.

[Operator]

Your next question comes from Walter Pritchard from Citi.

[Walter Pritchard, analyst]

Question for Bart and question for Kevin. Kevin, on the security side, you definitely are increasing your presence in the market. Can you talk about maybe impacts on the go to market, if you can sort of follow that same model with those products across the board? And then where are you even getting those products into the MSP channel and have a follow-up for Bart?

[Kevin Thompson, executive]

Yes. So Walter on the security side, we believe that we have picked parts of the security market where we can leverage the exact same go to market motion that we have in networking systems management and then we have MSPs because they go to more to in-cloud management for that matter. Because go to market motions are kind of 97% the same and there is 3% nuance based who the buyer is, and that's the way our view of the go to market for security will be also.

We pick the parts of the market where we can build a technology, where it is fully complete out of the box where it doesn't require professional services, where you don't need a tremendous amount of assistance in implementing those technologies and we've made sure that as we build them and get ready to release those products, that they meet the kind of promise of a SolarWinds product. That is that they need to be easy to implement. They need to be easy to use and they need to not require all of that so we think we'll be able to use the same go to market motion that we've been using. And you won't see us moving to a market where we don't believe we can do that, you know our go to market motion is a part of who we are. It is part of the DNA of the business. It is why we can run at the volume and velocity that we've been running.

As far as the security market goes or the MSP market goes, the variability threat monitoring product, we have a lot of excitement as it relates to the MSSP market, so the main security service provider market. And also we do believe a number of our MSPs have desire to provide some amount of security services. The question is do they have the level of expertise that they need yet? Ultimately they will have, I wouldn't say that a lot of them have it yet but I think that it will get created. But the MSSP market is already a managed service provider market where there's a good number of managed security service providers that we believe that we can sell vulnerability and threat monitoring to. So we are already pushing that through both of those go to market motions so we're saying we'll move through threat monitor now into the MSSP channel and we're also selling low range threat monitoring into -- directly into the core IT buyer. And that is one of those great products that has the ability to be sold to both sets of buyers. You'll see us continue to look for technologies that we can either build or buy, then we have the ability to sell to both of those markets because it just creates a larger TAM for those products as we get them into the marketplace.

And then, I think you said you had a question for Bart?

[Walter Pritchard, analyst]

Just a quick question, Bart, on the cloud side, cloud and MSP, could you help us understand maybe relative growth rate there versus last few quarters? Is that business accelerating? Has it been holding steady, any color there?

[J. Kalsu, executive]

Yes, what we've talked about before is that cloud is the higher piece of our subscription revenue growth, is growing at a higher rate than the MSP. The MSP obviously is a much bigger component of our subscription revenue, and it's growing in the -- it's just been consistently growing over 2018.

[Kevin Thompson, executive]

We really don't break those growth rates apart but combined, that revenue stream is growing in the low 20s right now. And we really are -- feel good about the ability to have strong growth rates in subscription revenue for a long time to come.

[Operator]

Your next question comes from Sanjit Singh from Morgan Stanley.

[Sanjit Singh, analyst]

I wanted to toggle back to the MSP business and subscription business overall. There's a lot of new offers that you guys have put together and the innovation in the product portfolio is pretty impressive. Can you give us a sense of, Kevin, of where -- how many services on average does the base have today, and where do you see that going over time?

[Kevin Thompson, executive]

So what I'll say is this, from a -- you'll get all the subscription offerings we have on the MSP side. There is really 2 ways to look at penetration. One is, how many services is the MSP using from us and then the other way to look at penetration is, how many of their customers are they delivering that service to. So you really have to look at it in both ways.

So we've got a higher penetration of the number of services that the average MSP is using from us. And that penetration rate really varies, based on the product. It ranges from kind of a low of 15% really to a high -- kind of a 40% attach of the services that sit on the top of the basic platform itself. But then the penetration rate in terms of, if you look at the number of customers have -- if MSP has 100 customers, for example. The number of those customers you are delivering all those services to actually tends to be lower than that so it tends to be -- if we're in the mid-30s attached then the number of customers we are providing that service to may be 8 or 10 points less than that on the average. So there's a big opportunity, growth opportunity, not only to get MSPs to buy more services from us to deliver for -- through their end users but even when they're using certain services, they're not providing all those services through to their end user because they haven't convinced that end user why they need to have that service delivered to them. And so we're always focusing on pushing both of those opportunities so it creates a really large customer opportunity inside that MSP base because there are really 2 ways to grow, which is a little different than -- not completely different but a little bit different, than what it -- we tend to see as out of an on-premise technology buyer.

[Sanjit Singh, analyst]

Very helpful. And then as a follow-up on the cloud management side. You guys have been offering better frankly in some of the more exciting spaces in infrastructure software, in ATM, log management, logging analytics, digital experience monitoring. Did you have a sense of how you think about competing against some pretty well known competitors in the space, not your typical large technology incumbents? Where you see your sort of opportunity there to grow some share in these fast growing markets?

[Kevin Thompson, executive]

Yes, so I think -- we're excited about all our products, but I get your point. And so when you look at those cloud manager products, I think that we're going to compete in much the same way we've always competed, meaning we're going to make sure that we've got technology to solve the problems we choose to solve better than our competitors’ products solve them. We won't solve every problem they solve but the problems we choose to solve, we're going to solve them more effectively. We're going to make sure that our price points are much more affordable than our competitors so if you look across our cloud management offerings, we're anywhere between 17% less than our competitors to as much as 70% less than our competitors in price. So we're going to create a pricing advantage that others simply can't touch because we've got a go to market motion and a business model that is just leaner, which allows us to do that. And then we're going to leverage this high velocity digital marketing sell from the inside motion that we have been perfecting. It's not perfected because it gets better all the time but we've been perfecting for the last 13 years that I've been here, to move at a velocity that others simply can't. We've got over 30,000 paying customers across our cloud management product. That's actually more customers than most of those companies you're referring to have. Now I will admit there are slightly better competitors maybe then the really large competitors that we still have left in the on-premise world. But if you looked back 13 years ago when we got here and we were very, very small, the CAs who we'd called to be brought by Broadcomm and the HPs on the software side who had to get bought by Micro Focus and the others that are -- the Quest that had to get bought by Dell and the list goes on. Those were good competitors 13 years ago. We simply out-competed them and it's our view we're going to do that again.

We're going go and disrupt the market. We've got a broader set of technologies than those companies had. We have on-premise coverage they simply don't have and never will have because they -- it's going to take them 20 years to create the capabilities we've created on-premise and if they -- while they're trying to do that, then we'll take the markets they are in today away from them.

So I don't think we've got the same set of competitive advantages. They may be a little bit younger in terms of age of company but they're making all the same mistakes. They're adding outside sales guys. They are doing custom contracts, they are customizing their technology for individual customers, all of those things will slow them down. Those are all things we simply refuse to do and so that competitive advantage we've created will come into play. It will allow us to be disruptive. It may take a little bit longer but we believe that absolutely will happen.

[Operator]

Your next question comes from Kasthuri from Bank of America.

[Kash Rangan, analyst]

Congratulations on going public again. I have 2 questions. One, Kevin, for you, with respect to the log market and the security -- infrastructure security market, you talked a lot about your go-to-market as being a source of differentiation and you also acknowledged that the cast of competitors is going to be slightly different. And that go-to-market approach that has worked so well for you in other markets maybe we probably ought to be tweaked? Your thoughts on that as to how you can compete more effectively? Is it really the go-to-market that's the competitive differentiation? Or is there going to be product differentiation that is going to help you be successful in security infrastructure and the logging market? And second and final for you Kevin, if you look through cycles, many cycles before, I'm curious what are some of the indicators that you're looking at to help you get a good gauge based on your prior experience as to how you could see a potential downturn, not so much of a downturn that we might be fearful of that you actually don't see? I'm curious how you look at things.

[Kevin Thompson, executive]

Yes. So to the kind of differentiation in log management and in the security market won't simply be our go-to-market motion, that does give us an advantage. Our ability to reach buyers of all sizes, all around the world through a digital marketing motion. Our ability to close transactions of all sizes and for that matter, levels of complexity, selling from the inside allows us to touch many, many more customers than these competitors we have can. Because they've adopted those traditional outside sales models and professional services and all the things that slow you down but we also believe we will have and do have even today our technology advantage. Our technologies are easier to use because we design that in from the beginning. Our technologies are a lighter weight. Our technologies are intuitive. We really focus on the UI and the user experience to make sure that we're building the product the way the user wants it built. Our very large user community, which we've been investing in for a number of years now, is an advantage in whatever product area we move into because we get direct feedback and direct research from thousands of technology pros in a way that none of our competitors can. So the competitive advantage really does extend beyond the go to market motion. I don't think it's going to have to be tweaked very much because the dev ops buyer and the IT ops buyer behave in very much the same way. In fact, we're finding they're even more likely to buy -- to try and buy without talking to us at all. A broadly meaningful percentage of our cloud management product revenue today, subscription revenue, is not just low touch. It is 0 touch. Our customer comes, puts a quarter in the slot and they start to use the technology and we'll start to generate revenue from them before we ever talk to them. Once they start using it for a little while, we're going to go talk to them and see if we can increase the size of their relationship more rapidly than maybe they're growing it on their own. But we are seeing a very low touch model there. Our productivity per sales rep is actually the highest in our cloud management products right now. And it is the very same motion that we're leveraging on-premise.

As far as it relates to kind of economic environment and buying -- the buying environment and what do we look for, I think we've got a couple of advantages in that we're not just selling to large enterprises. Large enterprise budget cycles behave in a very different way from smaller midsized businesses' budget cycles, meaning a small midsize business is going to be much more dynamic in how they manage their business. If they start to see impacts on their business, what happens to be -- what might be happening in the global environment. So I think if you look back historically at our performance during difficult economic periods, our growth rates were higher than all of our peers during those periods of time because the budgets start to contract and we're definitely not seeing that right now. And we have one of the strongest license sales quarters we've seen in a long time. We had a very good maintenance renewal quarter with maintenance renewal rate at around 95%. In the third quarter we had good subscription revenue growth so we're not seeing any indications. But I believe we will see them earlier than some of the large enterprise-focused vendors will because large enterprise budgets take a long time to be written -- to start to be reduced, when the small business is going to react a little bit faster.

So, we think we've got a price advantage. We think the fact that we can get to a level of price that no one else can touch. We solve problems that have to be solved, not problems that are nice to solve. So you have to keep your infrastructure up and running no matter what happens to be going on in your business or in the economy. And so we think all that gives us an advantage, if we end up an environment like that. But it’s not really my expectation right now. It’s not what we’re seeing. We’re not getting those signals from CIOs, and more importantly, we’re not getting those signals from the IT and tech pros that we are engaging with every single day at this point. So we're really not seeing any of that now but I think that’s how it would play out, if we were to end up in that kind of environment.

[J. Kalsu, executive]

Mike, we have time for 2 more quick questions.

[Operator]

Your next question comes from the line of Terry Tillman from SunTrust.

[Terrell Tillman, analyst]

A lot of the good juicy questions on your newer higher growth businesses have been asked. So I won't repeat some questions there. So maybe I am going to focus on license revenue. I think one of the comments was tenured sales leadership that has helped, maybe you can kind of talk about that a little bit more and why couldn't we see license growth? Maybe not at this level I am not going to try to pin you down with an 8% growth every quarter, which is good, but maybe some greater vitality in that license business going forward, given some of the leadership changes? And then I have a quick follow up for Bart.

[Kevin Thompson, executive]

When you look at the leadership team we have built over the last 3 years, that team is comprised of a number of folks who have been with us a very long time. The gentleman who runs that business has been here almost as long as I have. He started out in business development and worked his way up. He has got an EVP reporting directly to me and he's running our global sales org and so he's been in that team for a very long time. He's done a very nice job of complementing a seasoned and experienced SolarWinds team with some really strong leaders from the outside who have brought a lot of great people management capability. They challenge the way we think to make sure that we’re optimizing our motions and they’ve done a really great job, particularly internationally in delivering some very, very strong levels of consistent growth over the last 2 years. We feel very good about that team and we’ve also done a good job, I think, in the subscription side of our business, particularly in MSP, leveraging some really seasoned knowledgeable leaders who have been with us for a long time. We've put some very strong leaders underneath them, some of which we grew and some of which we brought in from the outside which gives us a very nice mix of SolarWinds experience, outside experience, which I think is giving us a really good level of performance right now. And [ SolarWinds when it relates to ] sales growth, what we said is look, we believe we can grow license revenue and I'm not committing to 8%. But we believe the opportunity is there to continue to take share or continue to see an increase in spend and on-premise IT infrastructure. We have now created the ability for you to manage the public cloud from our on-premise IT management product so you can see what’s going on in both in the public cloud and on-premise and in the connection in between through the same user interface, which increases the market opportunities for those on-premise products. We also have the ability actually to deploy those on-premise products in any of the public clouds so if you want to deploy one of those on-premise products in the public cloud and manage your cloud environment with them, you can and you'll still buy those from us through a license model because we don't offer them through a subscription model at this point and don't really have an intent to so we do believe we can grow license revenue.

We’re not dependent on growing license revenue to deliver the level of growth in the business that we want to deliver. We’re actually focused on doing that and we do think that opportunity is there and something we’re driving at so I don't think there’s a reason we can't. We’re just not -- we haven’t committed to a defined level of license growth and we don’t or are not dependent on it in the way we were in the past but we absolutely are trying to drive it.

[Terrell Tillman, analyst]

Okay. And I guess on that retention rate for next year, Bart, you gave us the preliminary revenue. High level of question but are you assuming about the same 105% retention rate? Or does is it is -- assume it drifts a little higher?

[J. Kalsu, executive]

In our model, Terry, we've modeled in consistent net retention rates in 2019.

[Kevin Thompson, executive]

We have time for one more question.

[Operator]

And your final question comes from the line of Matt Hedberg from RBC Capital.

[Matthew Hedberg, analyst]

Just one here. Kevin, you guys are extremely broad geographically, I think 190 countries or maybe more than that right now. Can you talk about was there any broad strokes of international success that you would call out? And I guess when we think about heading into next year as a lever of growth, how do think about balancing investments overseas versus domestically?

[Kevin Thompson, executive]

Yes. We've been seeing that in our international business as a whole growing at a faster rate for the last couple of years that our domestic business in most quarters and on annual basis for sure. We think that will continue. Globally only about 35% of our revenue across all product lines is outside of North America. Some of the products are slightly more than that. But in the total, it's only about 35% of our revenue outside the U.S. We do believe ultimately that ought to be more like 45% of our revenue should be outside the U.S. Cloud management is all in North America right now, for example. So the big growth opportunity outside North America. We really haven't put any reps outside North America to sell those products yet. Our MSP product revenue -- subscription revenue is a little more global in nature than the total. So you expect that international, and it's our expectation that international will grow at a slightly higher rate than our Americas business will grow as we look forward. The investment level, we're investing more now because we are trying to ramp the different areas of our business that are a very similar level of profitability. But we will make different investments in different quarters, if we're trying to expand in the regions. So we recently expanded a little more aggressively in Germany, for example, because that is not as big a market for us as it ought to be. It is much smaller than the U.K. And ultimately, it ought to be bigger than the U.K. if you just look at IT spending in the dog markets. And so we made some investments there. So you will see quarters maybe or maybe 6 months at a time where those investment levels will shift a little. But because we expect return on investment so quickly, it's not going to move the needle in any meaningful way. And with that, we're going to wrap the call up. We appreciate the questions and the attendance, and we look forward to continuing to interact with you guys. Thanks a lot.

[Operator]

This concludes today's conference call. You may now disconnect.