SolarWinds Corp

NYSE:SWI

Earnings Call Analysis

SolarWinds Reports Solid Q3 Performance with Strong ARR Growth

SolarWinds achieved total revenue of $200 million in Q3 2024, marking a 6% increase year-over-year and surpassing guidance. The annual recurring revenue (ARR) rose 8% to $724 million, with subscription ARR growing 36%. Adjusted EBITDA reached $96 million, reflecting a 13% increase and a 48% margin. Looking forward, Q4 revenue guidance is set at $201 to $204 million, expecting full-year revenue of $788 to $791 million, and raising adjusted EBITDA projections to approximately $376 to $379 million. The subscription-first strategy continues to drive momentum, showcasing a renewal rate of 97% and strong customer retention.

Strong Financial Performance in Q3 2024

In the third quarter of 2024, SolarWinds reported total revenue of $200 million, marking a 6% increase year-over-year and surpassing their previous guidance of $196 million. The company achieved substantial Annual Recurring Revenue (ARR) growth, reaching $724 million, an 8% year-over-year increase. Notably, the subscription ARR soared by 36%, totaling $289 million. Subscription revenue specifically was $76 million, which reflects a remarkable year-over-year growth of 30%. This positive trend is largely attributed to SolarWinds' successful subscription-first strategy, which emphasizes converting maintenance customers to more predictable subscription models.

Recurring Revenue Growth and Customer Retention

A significant highlight from the call was that 94% of total revenue now comes from recurring sources, underscoring the company's transition towards a more stable and predictable revenue model. The maintenance renewal rates remain strong, with a trailing 12-month renewal rate of 97% and a quarterly figure of 96%. Moreover, the company now counts 1,100 customers generating over $100,000 in ARR, which represents an 18% increase from the previous year. This demonstrates not only retention but also robust customer growth.

Profitability and Cash Flows

SolarWinds maintained strong profitability during this quarter, achieving an adjusted EBITDA of $96 million, which represents a 13% increase year-over-year. This results in a healthy adjusted EBITDA margin of 48%. The company also reported cash flow from operations of $115.5 million for the first nine months of 2024. Their strong financial position is further highlighted by a decrease in their net leverage ratio from 3x to approximately 2.8x trailing 12-month adjusted EBITDA.

Future Guidance and Revenue Expectations

Looking ahead, SolarWinds provided optimistic guidance for the fourth quarter, expecting total revenue between $201 million and $204 million, yielding around 2% growth at the midpoint. They anticipate adjusted EBITDA of approximately $95 million to $98 million, reflecting an 11% growth at the midpoint. For the full year 2024, revenue guidance has been raised to a range of $788 million to $791 million, corresponding to a 4% year-over-year increase at the midpoint. Adjusted EBITDA projections for the full year are now approximately $376 million to $379 million, indicating year-over-year growth of around 15%.

Continued Focus on Innovation and Product Development

SolarWinds is enhancing its product offerings significantly, particularly in observability and service management. The recent rebranding includes SolarWinds Observability self-hosted and SaaS versions, showcasing their commitment to improving system scalability by reducing customer footprint by up to 50%. Key advancements in AIOps, allowing for anomaly-based alerts, are designed to mitigate alert fatigue and improve incident response times. The use of generative AI within their enterprise service management solutions is improving operational efficiency, demonstrating greater adoption rates and higher sales prices.

Strategic Growth and Market Penetration

The management expressed a strong belief in their low customer concentration and critical solutions as key factors supporting their continued growth and resilience. They also noted the evolving market demands for hybrid and multi-cloud environments, which SolarWinds is strategically positioned to address. The ongoing transition to subscription models not only enhances revenue stability but also simplifies customer interactions and fosters a deeper engagement with existing clients.

Conclusion: Outlook for 2025 and Beyond

As SolarWinds approaches 2025, the emphasis will likely remain on expanding the SolarWinds platform while enhancing customer success strategies and profitability. While exact guidance for 2025 has not been provided, executives hinted that the fourth-quarter growth rate can serve as a proxy for future growth expectations. Investors should monitor the company's ability to balance profitability with necessary investments in innovation and market expansion.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to SolarWinds Third Quarter 2024 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Tim Karaca, Vice President of Finance. You may begin.

[Tim Karaca, executive]

Thank you. Good morning to everyone, and welcome to the SolarWinds Third Quarter 2024 Earnings Call. Sudhakar Ramakrishna, our President and CEO; and Lewis Black, our CFO, are with me today. Following our prepared remarks, we will have a question-and-answer session. This call is being simultaneously webcast on our Investor Relations website at investors.solarwinds.com. 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. Please remember that certain statements made during this call are forward-looking statements, including those concerning our financial outlook, our market opportunities, our expectations regarding customer retention, our continued evolution to a subscription-first mentality, our expectations regarding our partner ecosystem, the SEC enforcement action, the impact of the global economic and geopolitical environment on our business and our gross level of debt.

 

These statements are based on currently available information and assumptions, and we undertake no duty to update this information, except as required by law. These statements are subject to a number of risks and uncertainties, including the numerous risks and uncertainties highlighted in today's earnings release and our filings with the SEC. Copies are available from the SEC on our Investor Relations website. We will discuss various non-GAAP financial measures on today's call. Unless otherwise specified, when we refer to financial measures, we'll be referring to non-GAAP financial measures. A reconciliation of the differences between GAAP and non-GAAP financial measures and the definition of other financial metrics discussed on today's call are available in our earnings press release and summary slide deck on the Investor Relations page of our website.

 

Finally, we note that the financial results discussed on today's call and in our earnings release are preliminary and pending final review by us and our external auditors and will only be final once we file our quarterly report on Form 10-Q. With that, I will now turn the call over to Sudhakar.

[Sudhakar Ramakrishna, executive]

Thank you, Tim, and good morning, everyone. As always, I'd like to thank our employees, customers, partners and shareholders for their ongoing commitment to SolarWinds. I'm pleased to report that we delivered another strong quarter, once again exceeding our guidance across our key metrics. Our results testify to our team's commitment to customer success, the breadth and depth of our offerings and the trust that customers continue to place in us. I'm pleased with the execution of our teams, which resulted in strong top line and adjusted EBITDA growth.

 

Now turning to the business highlights from this quarter. First, we again delivered strong subscription revenue and ARR growth, highlighting the sustained momentum of our subscription-first strategy. Second, the increased adoption of our Observability Solutions continues to drive revenue growth. On October 2nd, we announced significant updates to this part of our portfolio, more on this in just a second. Third, we continue to experience a good balance of deal sizes across our regions and market segments. We believe our low customer concentration and the criticality of our solutions to customer operations continue to underpin our performance. Fourth, we continue to extend our solutions portfolio with the goal of delivering the best time to value and time to detect and resolve issues for our customers.

 

I will now touch on some Q3 financial highlights before turning the call over to Lewis for more color on the quarter and our financial outlook for the balance of the year. In Q3 2024, we delivered total revenue of $200 million, representing 6% year-over-year growth, above the high end of our guidance range. We continue to execute our subscription-first strategy and delivered year-over-year subscription revenue growth of 30% and subscription ARR growth of 36% in the third quarter.

 

Our third quarter in-quarter maintenance renewal rate was 96% and our trailing 12-month maintenance renewal rate was 97% flat from 97% last quarter and up from 95% in Q3 of last year. Our customer retention metrics remained robust, highlighting the compelling value proposition of our solutions. Total ARR in the third quarter was $724 million, an increase of 8% year-over-year. We delivered adjusted EBITDA of $96 million, representing 13% year-over-year growth with 48% margins. We continue to be a Rule of 50 company.

 

Turning to our product portfolio, as I've previously discussed, our purpose of enriching the lives of our customers is central to all we do. Reducing complexity, lowering costs and increasing our customers' productivity remain key motivating factors for our portfolio evolution. I believe our diverse array of solutions across observability, database performance monitoring and service management deliver unmatched time to value, time to detect and time to remediate issues. We serve customers across on-premises, cloud and hybrid environments, empowering them to make the best decisions for their organizations while adapting to their evolving needs. Customers facing higher cost and complexities from multiple vendors continue to use our platform to consolidate their tools, lower their total cost of ownership and increase visibility across their hybrid environments. We are encouraged by the traction here, highlighted by key wins in Q3 with both public and private sector organizations.

 

Turning to SolarWinds Observability. Most organizations have assets both on-premises and in the cloud. The complexity of these hybrid and distributed environments leads to visibility challenges resulting from a hybrid observability gap. This gap can cause degraded technology performance, prolonged issues identification and resolution times and even damaged customer experience from missed SLAs. These can further cause declining customer satisfaction, lost business and reduced tech ROI impacting a company's bottom line and future growth. Of course, customers try to counter the hybrid observability gap with many tools, leading to tool draw. Often, they are forced to prioritize either on-premises or cloud workloads due to the limitations of other software vendor solutions. However, we designed our observability solutions to close the hybrid observability gap and give our customers unified visibility across on-premises and cloud environments. It is gratifying to see growing validation in our approach as organizations increasingly turn to our platform to consolidate their tools, lower TCO and increase visibility across their environments. 

 

Earlier this month, we announced that our observability offerings are now collectively known as SolarWinds Observability. Our hybrid offering, previously known as hybrid cloud observability and our cloud native SaaS offering, previously known as SolarWinds Observability, will now be known as SolarWinds Observability self-hosted and SolarWinds Observability SaaS, respectively. This change, which we discussed at our SolarWinds Day on October 2, is tightly aligned with how we market our comprehensive observability solutions to our end customers. 

 

We continue to extend our versatile observability solutions in the market with key capabilities, including improving system scalability to help customers reduce their footprint by as much as 50%, thereby reducing their total cost of ownership; expanded support for Azure and AWS workloads, SD-WAN extensions, wireless access points and storage arrays. We believe these enhancements further improve our competitiveness in landing new customers as we help customers more readily eliminate tools from. 

 

We evolved our AIOps progress around anomaly-based alerts to reduce alert fatigue and to improve incident management. These enhancements can help customers reduce their time to detect and time to resolve issues. Our observability, database performance and service management solutions work together to deliver a great value to our customers. We are excited by the energy of our teams, bringing and sharing these improvements with our customers, and we are confident in the solutions we offer to the visibility problems our customers have told they face. 

 

Turning to SolarWinds Service Management. We are leveraging generative AI to extend our capabilities, allowing customers to auto generate run books, further accelerating remediation capabilities and time savings. We also continued our expansion journey with our enterprise service management platforms, enabling our customers to provide help desk solutions across any department in the organization. SolarWinds ITSM customers who enabled our Gen AI features have achieved meaningful year-over-year improvement in the meantime to resolve issues. We are seeing greater adoption of these Gen AI capabilities, which are part of our service desk solutions premium package and result in higher average sales prices. 

 

Now turning to our database performance management solutions. We continue to simplify the packaging and pricing of our database solutions. Now customers have the freedom and flexibility to choose the right solution for their environment. Analogous to the changes we implemented for our observability solutions over the last 2-plus years, we believe these will further simplify the customer experience, resulting in greater adoption and higher ASP. As always, we remain dedicated to helping customers reduce costs while enabling them to accelerate their business transformation. We believe this will give us further opportunity to expand our footprint in customers' environments and help them consolidate their tools. In closing, I'm proud of the progress we have made against the priorities we provided at the start of the year. 

 

First, we are extending our SolarWinds platform and delivering effective solutions built to help customers achieve hybrid visibility and manage their hybrid and multi-cloud environments. The recent announcements on SolarWinds Observability represent significant milestone achievements against this priority. Second, investing selectively while continuing to exercise expense discipline and seeking expanded profitability as evidenced by portfolio evolution, top line growth and bottom line profitability. Third, focusing on subscription and total ARR growth, customer success and retention, growing profitability and creating more value for our shareholders. We aim to continue to deliver compelling value to our customers. The relevance of our solutions and the commitment of our teams gives me high confidence in our ability to deliver a strong Q4. With that, I will now turn it over to Louis to expand on our financial performance and provide our fourth quarter and full year 2024 outlook. Lewis?

[Lewis Black, executive]

Thank you, Sudhakar. I'm thrilled to be here with all of you today on my first SolarWinds earnings call. We delivered a strong third quarter and continued the momentum we built in the first half of the year. Like Sudhakar, I am confident in our ability to achieve our business and financial goals in the remainder of 2024. Although the IT spending environment continues to be challenging, we continue to see growth in the mix of predictable recurring revenue and have delivered sustained ARR growth.

 

 I'll now turn to the numbers. We finished the third quarter with a total revenue of $200 million, a 6% increase compared to the prior year and above the high end of the outlook for total revenue of $196 million that we provided last quarter. We ended the third quarter with total ARR of $724 million, up 8% year-over-year. Our subscription ARR at the end of the third quarter was $289 million, an increase of 36% year-over-year. This growth continues to be driven by the execution of our subscription-first strategy. We had 1,100 customers with over $100,000 of total ARR, representing 18% growth over the prior year. Digging into the revenue details, our third quarter subscription revenue was $76 million, up 30% year-over-year. 

 

The increase in subscription revenue continues to reflect the success of our subscription-first strategy, which includes converting a portion of our maintenance base to our subscription products. Maintenance revenue was $111 million in the third quarter, down 5% compared to the prior year. This decline was expected as we continue to convert existing customers to our SolarWinds observability products. Our maintenance renewal rate is 97% on a trailing 12-month basis and was 96% for the third quarter. To remind you, as we convert maintenance customers to subscriptions, we exclude those customers from this renewal rate calculations. Due to the subscription revenue growth and strong maintenance renewal rates, 94% of our total revenue is now recurring revenue. For the third quarter, license revenue was $13 million, down 10% from $14 million in the third quarter of 2023. As a reminder, our subscription-first focus has and will continue to affect our license sales performance. 

 

Our focus on operating discipline continues to drive results, and we delivered another strong quarter of non-GAAP profitability. Third quarter adjusted EBITDA was $96 million, growing 13% year-over-year, representing an adjusted EBITDA margin of 48% and coming in $3 million above the high end of the $93 million outlook we gave for the quarter. Turning to our balance sheet. Our net leverage ratio at September 30 was approximately 2.8x our trailing 12-month adjusted EBITDA compared to 3x at the end of last quarter. As always, we will monitor the interest rate environment and look for opportunities to further reduce our variable interest rate in the future. We generated $115.5 million in cash flow from operations in the 9 months ended September 30. Our cash and cash equivalents and short-term investment balance at quarter end was $199.2 million. Our non-GAAP diluted earnings per share were $0.27, which was above the guidance range of $0.24 to $0.26. This beat was largely due to our improved profitability. 







I will now walk you through our outlook before turning it over to Sudhakar for final thoughts. I will start with our fourth quarter guidance and then discuss our updated outlook for the year. For the fourth quarter, we expect total revenue to be in the range of $201 million to $204 million, representing 2% growth at the midpoint. Adjusted EBITDA for the fourth quarter is expected to be approximately $95 million to $98 million, representing 11% growth at the midpoint. Non-GAAP fully diluted earnings per share are projected to be $0.27 to $0.28 per share, assuming an estimated 175 million fully diluted shares outstanding. Finally, our outlook for the fourth quarter assumes a non-GAAP tax rate of 26%, and we expect to pay approximately $9 million in cash taxes during the fourth quarter. For the full year, we are pleased to raise the revenue guidance and expect total revenue to be in the range of $788 million to $791 million, representing 4% year-over-year growth at the midpoint. 





We are raising our adjusted EBITDA for the year, which is now expected to be approximately $376 million to $379 million, representing 15% year-over-year growth at the midpoint. Non-GAAP diluted earnings per share are projected to be $1.08 to $1.09 per share, assuming an estimated $173.9 million fully diluted shares outstanding. Our full year and fourth quarter guidance assumes a euro to dollar exchange rate of $1.06 to EUR 1. With that, I'll return the call to Sudhakar for his closing remarks.

[Sudhakar Ramakrishna, executive]

Thank you, Lewis. I'm pleased with our progress in the third quarter, evidenced by our strong financial performance and the platform updates that address our customers' evolving and critical needs. We delivered a strong Q3, and I'm confident about closing Q4 and 2024 on a high note as we continue to execute our strategy, which we set more than 3 years ago. As I look to the future, I remain optimistic for several reasons. First, we continue to serve a large, growing and diversified customer base with a broad array of solutions, allowing us to increase our share of wallet while growing our relevance. We believe the growth in our ARR and strong customer retention proves this out. Second, our SolarWinds platform continues to mature, enhancing our ability to add functionality at a lower marginal R&D cost. This was always the premise of building a platform, and it is beginning to bear fruit. Third, our strong customer and partner base, fantastic customer success teams, events like the recent SolarWinds Day on October 2 and the Tack community are great sources for understanding emerging trends and evolving customer needs. 



We believe this increases our ability to deliver customer-relevant solutions and derisk our portfolio development efforts. Fourth, our go-to-market efforts continue to grow from our strong heritage of inside sales with a broader and more committed partner ecosystem spanning distributors, resellers, managed service providers and cloud service providers. These partners broaden our reach in a cost-effective way. Finally, and most importantly, I'm proud of our teams for remaining steadfast in the purpose of enriching the lives of our customers. I believe we are best positioned to help customers reduce the complexity of their hybrid environments, improve visibility, increase productivity and reduce their costs. Again, I want to thank our employees, partners, customers and shareholders for their continued commitment to SolarWinds. Lewis and I are now happy to address your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Rob Oliver with Baird.

[Robert Oliver, analyst]

Sudhakar, we had the opportunity to attend your product rollout earlier in October and very impressive, and you guys have made a ton of progress across all of your different product areas, particularly around cloud enhancements. I'd be curious, and I know it's still early with the new functionality, but when you look at the different areas, whether it be hybrid cloud observability or database observability, where you're seeing kind of the most signs of traction right now, if there's any one area to call out or also maybe what you're hearing from some of the increased activity with your partners around where they're seeing the most pull from these products and activity in their pipeline? And then I had a quick follow-up for Louis as well.

[Sudhakar Ramakrishna, executive]

Sounds good, Rob. And thank you again for your ongoing support. the approach that we have taken with the SolarWinds platform and the integrated solutions is to be able to intersect a customer in their journey and be able to help them evolve it. And that could start from a customer who is on on-premises with some assets in the cloud or a customer that might be committed fully to the cloud. So it really doesn't matter to us in terms of how we have architected our solutions. It's all about providing them flexibility. Now to your point about where do we see the pull, instead of looking at it as a particular functionality, we should be looking at the broader context of the customer. And most customers are looking at how do I bridge the on-premises and cloud divide, so to speak. Today, they use a number of tools to address it. And with our solutions, they're able to not only get hybrid visibility, but also consolidate vendor tools. That's one reason why I would suggest you're seeing a continuing increase in our $100,000-plus ARR customers. And so it really depends on the customer, but with the platform flexibility that we have, we are able to address and intersect very, very quickly.

[Robert Oliver, analyst]

Okay. That's helpful. And then, Louis, just a bit of an open-ended question from you. But now that you've been in your seat now for a little over a quarter, I just wanted to get a sense from you of kind of your thoughts, obviously, very powerful financial model at SolarWinds, highly profitable. I think what we hear often from investors is when -- a lot of positive changes here, when could top line growth pick up? You're certainly not asking you to guide to '25. But when you look at the model and some of what you've seen now here being in your seat over a quarter, perhaps some observations on some of your goals or priorities in the seat.

[Lewis Black, executive]

Okay. Sure. Thank you for the question. So first thing is that the reason that I joined the company, I saw an attractive market and that the company had a great strategy.  It would align to the market and the customer needs. And the business had an incredible customer base to continue to develop, grow and deliver value for. So all of these beliefs coming into the company, all I've done is I've further kind of validated the assumptions that I had in coming into the company. In terms of the business model, the business model is very powerful. I think the strategy is clearly aligned to both where the market is going and the needs of the customer. So I see it as long-term and sustaining. We are early days in terms of the transformation journey, and we still have a long way to go. But the thesis of developing a platform, expanding and broadening the capabilities of that and then leveraging the installed base to deliver continued future value to the customers, it is a long-term sustained play. A lot of value will continue to be delivered, and I'm very excited about the opportunity ahead.

[Sudhakar Ramakrishna, executive]

Rob, Louis Han mentioned this, but in addition to significant financial capabilities and background, he also brings significant operational expertise to the table. That will allow us to hone in on specific and targeted investments more efficiently than we were able to do before. And our journey of profitable growth will continue. As you know, we just reported 8% ARR growth and 94% of our business is now recurring. So that gives us a super solid foundation to continue our journey, but we are also very prudent about how to think about the future.

[Operator]

Your next question comes from the line of Matt Hedberg with RBC Capital Markets.

[Matthew Hedberg, analyst]

Congrats on the results. It's really good to see the momentum. I guess, the doctor, your growth rate continues to kind of tick up here this year and the beats are getting larger relative to what we saw earlier this year. And I'm just curious could you put a finer point on the demand environment? I know you said it was sort of stable, but the results are certainly feel better than stable. So just kind of curious if you could help us understand some of the demand trends that you're seeing.

[Sudhakar Ramakrishna, executive]

Definitely, Matt. First of all, thanks again for your ongoing support of SolarWinds. I am very pleased with the results that we delivered, and it is simply an indication of ongoing progress and validation of our strategy and execution abilities. With regards to the demand environment, as you know, we have a very large and diversified customer base, both by geo as well as market segment. A lot of our expansion or growth definitely comes from our installed base as we support them with broader solutions, more ability to consolidate their platforms, simplify their, or reduce their cost, I should say, and increase their productivity. So a lot of our demand comes from that. But we also have been getting our fair share of new customers as well. In terms of the trends in the demand itself, I would say that -- and as I've consistently been reporting, we haven't seen like huge variations up or down in demand. And given the macro uncertainty, we continue to be prudent about future quarters and years.

[Matthew Hedberg, analyst]

Got it. And then one for Lewis on the role again. And I guess a little bit of a follow-up to the last question. I guess I'm sort of curious about your guidance philosophy. I don't know how trends were in October. I assume they're continuing to be stable. But I'm just sort of curious like how do you think about like the prospects of a 4Q budget flush embedded in the guidance? And just maybe a little bit more on sort of your approach to building out a forecast.

[Lewis Black, executive]

So a number of factors play into that. One is how the business is performing today. Secondly is what we can see in terms of the market playing out going forward and what are the things that we can validate. We try and get as much information from the market and external sources to see what other companies are seeing as well. And then we apply a combination of how the business is performing, apply that to what we're seeing in the market. determine what we believe an appropriate forecast and guide is. And that will, of course, be tempered with a level of prudence to make sure that what we can deliver, we are able to or to make sure that what we state, we have confidence that we will be able to deliver. So I believe it's fairly consistent with the approach that has been applied historically. I think it has been a solid approach. And I know that the company has had a great record of being able to deliver the guidance that has been given historically. And our goal and my expectation is that we will continue that.

[Operator]

Your next question comes from the line of Sanjit Singh with Morgan Stanley.

[Sanjit Singh, analyst]

On the solid Q3 results. In addition to onboarding Lewis as the new Chief Financial Officer, and congrats, Lewis, on the role, you also brought on a new Chief Revenue Officer. So, I was wondering if you could just give us some insight into the particular capabilities of this executive coming on board. And if you give us a sense of the magnitude of change that we should expect to the sales force. Obviously, we're coming up on in Q4. But then going to 2025, what is going to be his priorities and objectives going into next year?

[Sudhakar Ramakrishna, executive]

Thank you again, Sanjit. Good to hear from you. Andrew has joined our company and has jumped right in. In terms of major strategic shifts in go-to-market, I would not suggest that there will be any in the sense that a lot of the foundations that we have laid out, and I'll remind everyone that our foundations of a very robust inside sales motion will continue. That is something that the rest of the market has tried to emulate. And that is the, in my opinion, one of the most scalable go-to-market models you can build.

 

At the same time, we saw opportunities working with partners, working with global system integrators, our cloud service providers to expand our market reach. Andrew comes in with significant experience in those areas, be it with the partner ecosystem and the global system integrator space. So what I'm hoping and expecting as we get into 2025 and beyond is that Andrew will bring his vast skills and extend our current go-to-market models into those. But we'll always be very careful with how we deploy go-to-market resources and ensure that our expense-to-bookings ratios are consistent with our financial goals.

[Sanjit Singh, analyst]

Understood. That was very clear. As a follow-up, I had a question on Gen AI and Gen AI as it relates to the pricing strategy sort of going forward. And so it's sort of a 2-parter. So, you mentioned in your script about enterprise service management. As customers take on more of those Gen AI capabilities in service management, what sort of uplift are you seeing relative to your standard offering? And then more broadly, as the observability push gets more mature and enterprise service management gets more mature. How are you thinking about pricing? There's definitely a sort of debate on seat-based models versus more utility consumption-based models. Should we anticipate that those more consumptive type pricing models start to layer in within Service Now, sorry, within Solar Winds over time?

[Sudhakar Ramakrishna, executive]

Sanjit, the consumptive models, and consumption-based pricing models are things that we continue to contemplate, but not something that you should model or we have modeled at this point in time. With regards to Gen AI and the monetization of it, as I noted in my script, we have extended our enterprise service management and Gen AI capabilities, especially things like automated run books, et cetera, are part of our premium package. And the idea there is that customers should see compelling value there. And as they buy more of that, we get an automatic ASP uplift. So it's not something where we charge for Gen AI as much as GenAI is a capability of significant product enhancements and, of course, value delivery to customers, and that will be the approach that we will take. And the ASP uplift, we'll keep referring to how we are progressing there, but the early indicators on enterprise service management is there's a lot more leaning towards the premium package, which is a way for us to monetize GenAI.

[Operator]

Your next question comes from the line of Pinjalim Bora with JPMorgan.

[Pinjalim Bora, analyst]

Sudhakar, just one question for you. It seems like a nice bump in the 100,000 customers sequentially. Maybe talk about the drivers. It seems like you said consolidation. Is that the main driver? Is there that up skewing into kind of premium SKUs? Is that also happening or more adoption across the 3 product pillars? Maybe just double-click into that.

[Sudhakar Ramakrishna, executive]

Absolutely. The first driver I would highlight is the ongoing conversion to subscription. As we have converted our maintenance base to subscription, there's always an opportunity to discuss the value with the customer. And as you remember, I have noted that our subscription transition is not simply a business model transition as much as it is a value model transition. So in many of those conversations, we consolidate customers' tools. So that, in essence, means that we are getting a larger share of wallet. That is definitely one aspect of it. 

 

The second increasingly is the fact that we have a more unified observability solution that spans on-premises and cloud and closes the hybrid visibility gaps is enabling us to win larger deals. That's an early trend, but that's definitely a contributing trend. And the third piece is what you mentioned, which is some of the upstream customer requirements, especially as we selectively go upstream into the enterprise through GSI partners, that's also a contributing factor.

[Operator]

Your next question comes from the line of Miller Jump with Truist Securities.

[William Miller Jump, analyst]

I will echo my congrats on the solid execution. I actually also wanted to double-click on some of the consolidation theme that has come up a couple of times on the call. Just wondering if you could give a little more color on these deals. Is it a motion where your sales team is proactively reaching out and driving this consolidation? Are customers really coming to you kind of at renewal cycles? And then maybe just is there any difference between that sales cycle versus your traditional one?

[Sudhakar Ramakrishna, executive]

Definitely, the renewal cycle is an instigator for a broader conversation. But we are not restricted only to a renewal cycle, and it is in the spirit of continuous touch. As we have been discussing as part of our go-to-market evolution over the last 3 years, while we had a very strong transactional motion historically, what we have done is evolve that transactional motion to more of a continuous touch motion. We have an incredibly strong customer success team that is regularly in touch with customers, understanding, doing pulse checks, figuring out their ongoing needs. And I spoke about the community effect as well. So there is both a push and a pull here.

[William Miller Jump, analyst]

And then maybe for Louis, I know you're not guiding '25, but just curious if you could talk at a high level about the key drivers you're thinking about in the model for next year, given ongoing transformation, in particular, interested if you see any catalyst for acceleration of the transition.

[Lewis Black, executive]

As I said earlier, it's a long-term model that we are building into. So from a priority standpoint, we'll continue to extend the Solar Winds platform. We'll invest selectively around potential growth opportunities while continuing to exercise expense discipline. And we'll focus on the subscription ARR, customer success, and continuing to grow profitability. So these are all the areas that we will be focusing on going into next year. And although we're not going to give guidance, we will give guidance during the Q4 call for next year. As you think about modeling for 2025, you should look to the implied Q4 exit growth rate, which I think is a good kind of baseline and proxy for how you should be thinking about next year.

[Operator]

Your next question comes from the line of Patrick Colville with Scotiabank.

[Patrick Edwin Colville, analyst]

It's a real pleasure to be part of the Solar Winds story. I guess I want to ask about EBITDA margin. In 3Q, EBITDA margin hit a record high, which is undoubtedly very impressive to see. But in our launch, one of the questions we received kind of quite frequently from investors was how Solar Winds is thinking about balancing margin versus the investments in go-to-market and product development given the market opportunity you highlighted. So do you mind just talking to that, I guess, kind of qualitatively of how you think about that kind of balance between profitability and investment on a go-forward basis?

[Lewis Black, executive]

Sure. I'll take that, Sudhakar. So clearly, we have a policy and a strategy to balance growth and profitability, and we will continue to do that. So we're always looking to consider opportunities to drive more growth and we will continue to do that where we see there's a clear return coming back on the investments that we're making. But we're also highly focused on profitability. Profitability continues to be an important factor for us. So we are going to balance the growth investments as well as the opportunity to continue to streamline and simplify and make our business more efficient.

[Patrick Edwin Colville, analyst]

Okay. Understood. And then in terms of the product name changes, I mean, I think that makes a ton of sense to us to kind of simplify the nenclature. I guess I want to ask about Solar Winds SaaS. How is that progressing in terms of adoption? And are there any quantitative metrics you'd be willing to provide in order to allow us to understand adoption of Solar Winds SaaS as of 3Q?

[Sudhakar Ramakrishna, executive]

Patrick, I'll touch on it, and Luis might want to elaborate. We do not break out into SaaS and other types of consumption. The primary reason on the observability side is, as we noted on our October 2 announcements, we have looked at on-premises to cloud, be it self-hosted or SaaS consumed as a continuum. There are lots of customers where they have both our solutions, and we are helping them actively bridge those as well. So it kind of becomes difficult to split those out. What I can say qualitatively is that we continue to make strong progress in that dimension. And my expectation is that the continued progression will be a function of where the customers are in their journey and how they plan to evolve it.

[Operator]

And that does conclude our question-and-answer session. And I will now turn the conference back over to Sudhakar for closing comments.

[Sudhakar Ramakrishna, executive]

Thank you again, and I appreciate everyone's attendance today and the questions. We will keep you posted on our progress.

[Operator]

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation, and you may now disconnect.