SolarWinds Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

Key Takeaways

  • Record Q3 performance: Total revenue of $190 M, up 6% year-over-year and above guidance, with subscription revenue growing 39% and ARR up 34%, driving 92% recurring revenue.
  • Strong profitability: Adjusted EBITDA rose 21% year-over-year to $85 M (45% margin), the highest quarterly margin since Q4 2020, exceeding the high end of guidance.
  • Customer retention and expansion remained robust, with in-quarter maintenance renewals at 96%, trailing-12-month renewals at 95%, and customers spending over $100 K growing 8% YOY to 955.
  • Raised outlook: Q4 revenue guidance of $188.5 M–$192.5 M (2% YOY growth) and full-year 2023 revenue guidance boosted to $749 M–$753 M, with adjusted EBITDA now expected at $322 M–$324 M.
  • Facing a civil enforcement action by the SEC over the Sunburst cyberattack, the company expects one-time legal and investigation costs to fluctuate and potentially rise in future quarters.
AI Generated. May Contain Errors.
Earnings Conference Call
SolarWinds Q3 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good morning. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to the SolarWinds Third Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer number 1, thank you.

Operator

Tim Khoraja, Group Vice President of Finance, you may begin your conference.

Speaker 1

Thank you. Good morning, everyone, and welcome to the SolarWinds Q3 2023 earnings call. With me today are Sudhakar Ramakrishna, our President and CEO and Bart Kalsu, our CFO. 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.

Speaker 1

Solarwinds.com. You can also find our earnings press release and the 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, to our market opportunities, our expectations regarding customer retention, our continued evolution to a subscription first mentality and the timing of the phases of such evolution, 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.

Speaker 1

Copies are available from the SEC on our Investor Relations Web to the operator. We will discuss various non GAAP financial measures on today's call. Unless otherwise specified, while we refer to financial measures, we will be referring to non GAAP financial measures. A reconciliation of the differences between GAAP to non GAAP financial measures and a definition of other financial metrics discussed on today's call are available in our earnings press release and summarize slide deck on the Investor Relations page of our website. Finally, we note that the financial results discussed on today's call and 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 10Q.

Speaker 1

With that, I will now turn the call over to Stocker.

Speaker 2

Thank you, Tim, and good morning, everyone. Thank you for joining us today. As always, I'd like to thank our employees, customers, partners and shareholders for their ongoing commitment to SolarWinds. We delivered another strong quarter, once again beating our guidance across our key metrics, demonstrating the compelling value we deliver to customers And the strength of our business model. I'm especially pleased with our team's execution across many aspects of our business, Resulting in top line growth while driving adjusted EBITDA that exceeded the high end of our guidance range, all in an uncertain macro environment.

Speaker 2

3rd quarter results include Strong subscription revenue and ARR growth demonstrating the positive effects of our subscription first strategy. Growing revenue and adoption from our observability solutions coupled with continued product innovation. Growth in the sales of our service management and database monitoring offerings, continued strong customer retention, demonstrating our focused execution as well as the value proposition of our solution and double digit year over year adjusted EBITDA growth along with increased margins highlighting the operating leverage in our business and our commitment to expense management and operating discipline. I will now touch some of these highlights before turning the call over to Bart for more color on the quarter and our financial outlook for the balance of the year. In Q3 2023, We delivered total revenues of $190,000,000 above the high range we provided, Representing 6% growth year over year and our highest quarterly revenue growth since the Q1 of 2020.

Speaker 2

We continue to see the benefits of our subscription first transformation And delivered 3rd quarter subscription revenue growth of 39% and subscription ARR growth of 34%. This evolution to subscription is not only contributing to our overall improved financial performance and revenue predictability with more than 92% of recurring revenue, but we believe it enables us to deliver greater value to customers. In the Q3, our in quarter maintenance renewal rate was 96% and our trailing 12 month Maintenance renewal rate is now 95%, up from 94% last quarter and 91% in the prior year. This increase is another reflection of the value of our solutions to our customers. We ended to the Q3 of 2023 with 9.55 customers who have spent more than $100,000 with us in the last 12 months, an increase of 8% over the comparable period in the previous year.

Speaker 2

These results are indicative of our focus on helping our customers reduce tool sprawl, reduce alert fatigue And reduce costs while improving productivity. We delivered an adjusted EBITDA of $85,000,000 Representing an adjusted EBITDA margin of 45% and a 21% increase year over year, driven by revenue growth and maintaining investment and expense discipline. Our adjusted EBITDA margins The highest quarterly results since the Q4 of 2020 for both adjusted EBITDA and adjusted EBITDA margin. The results testify to our progress towards continued robust growth and operating discipline. Now turning to some business highlights from this quarter, I want to share updates on our product portfolio and partner ecosystem And the broad industry recognition we have received.

Speaker 2

Our product and engineering team Continue to deliver capabilities rapidly on our SolarWinds platform and recently delivered network and infrastructure observability to give customers a SaaS option in addition to our self hosted hybrid cloud observability. Our solutions strive to deliver the best time to value, time to detect and time to remediate issues In our customers' multi cloud environments. Our hybrid cloud observability solution continues to gain wide Spread customer adoption as it helps customers to reduce tool sprawl, reduce alert fatigue through AI ops services, Achieve deployment flexibility and prepare for a hybrid multi cloud world. Central to our hybrid cloud observability strategy is the ability to support and interoperate with a wide range of assets inherent in heterogeneous environments. And in Q3, we added significant capabilities to support modern SD WAN solution.

Speaker 2

We believe the combination of hybrid cloud observability and SolarWinds observability provides the most comprehensive AI powered full stack observability solution in the industry across networks, infrastructure, applications And databases. As I have described in previous calls, we intend to make the SolarWinds platform The foundation for all future innovation. Additionally, at our SolarWinds Day, to the Virtual Summit in September, we announced new product enhancements to our service management and database observability solution. Our new enterprise service management solution extends the value of our service management capabilities beyond IT teams, allowing enterprises to improve the management, efficiency, interaction and user experience across any department of their organization. With our new solution, customers who currently rely on disparate And disconnected tools across departments to manage workflows and service requests can greatly to improve response time and employee experience.

Speaker 2

We also announced an upgraded version of our comprehensive database performance monitoring and data ops solution, SQL Sentry. The extension aims to significantly enhance our customers' ability to identify and prevent database performance issues, Avoid outages and enjoy the most out of their databases while lowering risk. Turning to our partner ecosystem. We announced updates to our Transform Partner Program in August. Designed to accelerate growth and revenue for our partners, these updates provide greater flexibility for our partners To achieve their targets, new opportunities for channel offering improvements and specialized options for database and ITSM products.

Speaker 2

As you've heard me discuss in recent quarters, our partners and global system integrators on increasingly important element of our go to market motion that can help us expand our reach to customers in a scalable, efficient and cost effective manner. Lastly, I'm pleased that we have earned multiple product to an industry award this quarter, including the SolarWinds Next Generation Build System Won the 2023 Cloud Security Award for the Best Security Infrastructure in Enterprise. SolarWinds won the GLOBE Award as Most Innovative Company of the Year in the Cloud SaaS category. SolarWinds Observability won the 2023 Cloud SaaS Award for Best SaaS Product for IT Management. In closing, we had another strong quarter and we are making excellent progress against the priorities we laid out for 2023.

Speaker 2

1st, we continue to seek to drive subscription adoptions across our business, Which is seen in our strong subscription revenue and ARR growth results. We believe this is consistent with how our customers want to and that an increase in our subscription base provides an even more solid foundation for our revenue and margin expansion efforts. 2nd, we continue to accept high expense discipline in a challenging macro environment by investing selectively while managing costs and improving our operating margins as reflected in our 21% adjusted EBITDA year over year growth in Q3. 3rd, we remain very focused on customer retention and expansion efforts as evidenced by our improved renewal rates. And 4th, we continue to innovate on our SolarWinds platform organically and with our expanding ecosystem to bring even greater value to our customers.

Speaker 2

While there is much work left to do, we believe we are in a great position to achieve what we had hoped to accomplish this fiscal year And enter 2024 with strong momentum. We believe IT environments continue to grow in complexity, While budgets remain constrained, and therefore, customers value solutions that improve productivity and lower costs. I believe our comprehensive observability, service management and database products and services are ideally suited to address these growing challenges and we are becoming an even more relevant to our customers' current and future needs. Our Q3 results reflect our increasing relevance to our customers. With that, I will turn it over to Bart to expand on our financial performance and provide a full year outlook.

Speaker 2

Bart?

Speaker 3

Thanks, Sudhakar. Our subscription first strategy continues to make solid progress. As you know, historically, we sold on premises Licenses and maintenance to our customers. The first phase of our subscription transformation involves converting our existing maintenance base to subscription via our self hosted hybrid cloud observability product. We are now seeing a bigger shift in new sales to our subscription offerings, driven by our observability solution and our database and service desk products.

Speaker 3

The second phase began with the launch of SolarWinds observability, our SaaS solution. So whether we sell hybrid cloud observability or SolarWinds observability, we believe this lays the foundation for even more predictable recurring revenue and the opportunity to expand the lifetime value with customers. We've seen great progress with this transformation and we believe we are in a position to continue our momentum through the Q4. It is worth noting that our Q3 performance puts us back in the position of being a Rule of 50 company. We believe that with our focus on investment and operating discipline and a broadly diversified portfolio of solutions participating in growing markets.

Speaker 3

We can be a Rule of 50 company on a sustained basis. Turning to the numbers. We finished the 3rd quarter with total revenue of $190,000,000 a 6% increase compared to the prior year and above the total revenue range of outlook we provided of $182,000,000 to $186,000,000 You will notice a meaningful shift in our revenue mix, Which reflects our subscription transformation. We continue to have a larger percentage of our new sales as subscription products. We ended the Q3 with total ARR of $668,000,000 up 8% year over year.

Speaker 3

Our subscription ARR as of September 30th was $213,000,000 an increase of 34% year over year. This growth is primarily due to the execution of our subscription first strategy, the continued conversion of a portion of our maintenance base to the hybrid cloud observability to the solution and growth in our database and Service Desk subscription products. Digging into the revenue details, Our Q3 subscription revenue was $59,000,000 up 39% year over year. Our subscription revenue growth reflects the ongoing success of our subscription first efforts. We continue to convert maintenance customers at a higher than 1:one ratio as they see the value of our observability products in the need to manage their hybrid IT environments.

Speaker 3

In addition, a higher percentage of our new deals are being sold as subscription arrangements. Subscription revenue was also positively impacted by multi year arrangements in the Q3. Maintenance revenue was $116,000,000 in the 3rd quarter, an increase of 2% from the prior year. The increase is attributed to our high renewal rates and the higher than normal price increase we implemented at the start of the year. As previously discussed, our maintenance revenue has been impacted by converting a portion of our maintenance customers to subscriptions And by selling a larger percentage of new sales as subscription products in line with our subscription first strategy.

Speaker 3

Our maintenance renewal rate is 95% on a trailing 12 month basis and was 96% for the 3rd quarter. The trailing 12 month rate was the highest rate since the Q4 of 2019. We believe this testifies to the loyalty of our customer base, the value of our solutions and our focus on customer retention and expansion efforts. Note that as we convert maintenance customers to subscription arrangements, we exclude those customers

Speaker 1

from our renewal rate calculation.

Speaker 3

As a result of the growth in subscription revenue and strong maintenance renewal rates, we now have 92% of our total revenue as to recurring revenue. For the Q3, license revenue was $14,000,000 representing a decline of approximately 37% compared to the Q3 of 2022. Remember that with our increased efforts on subscription transformation, we expect new perpetual license Sales performance will continue to be negatively impacted. This is by design and the increased subscription sales continue to more than offset the decline in license revenue. We finished the Q3 of 2023 with 9.55 customers who have spent more than $100,000 with us in the last 12 months, Which is another quarter of year over year improvement over the Q3 of 2022 as well as a sequential increase over the Q2 of this year.

Speaker 3

I'm pleased to report that we delivered another quarter of strong non GAAP profitability. 3rd quarter adjusted EBITDA was $85,000,000 growing 21% year over year, representing an adjusted EBITDA margin of 45% and coming in 8 and $500,000 above the high end of the outlook we gave for the quarter. Excluded from adjusted EBITDA in the 3rd quarter are one time expenses of approximately $2,900,000 related to the cyber incident, net of insurance reimbursements. We continue to expect one time cyber incident related costs to fluctuate and increase in future quarters related to the litigation with the SEC. As we discussed in our earnings call in May, we are focused on our capital allocation, disciplined expense management in driving operational efficiencies across our business, while focusing on growth and our broader subscription transition.

Speaker 3

Given the uncertain macro outlook for 2023, we optimized our expense structure as part of to our ongoing focus on improving operating margins in the first half of the year. During 2023, these optimizations resulted in $20,000,000 of restructuring charges, primarily associated with $14,000,000 of lease impairments for certain office locations and costs related to headcount reductions. Looking ahead, we will continue to monitor the environment closely and we plan to hire selectively and continue to manage our costs in a disciplined manner. Turning to our balance sheet. We've made significant progress Reducing our net leverage ratio, which at September 30th was approximately 3.2 times our trailing 12 months adjusted EBITDA.

Speaker 3

This compares to 3.9 times at the end of last year. We have significantly improved our leverage position in 2023 through improved performance and our ability to convert non GAAP profitability to cash flow. As communicated before, we will continue to execute our plans to get below 3 times net leverage. Our cash and cash equivalents and short term investments balance was $235,000,000 at the end of the 3rd quarter, Bringing our net debt to approximately $1,000,000,000 I will now walk you through our outlook before turning it over to Sudhakar for final thoughts. I will start with our Q4 guidance and then discuss what that means for the full year.

Speaker 3

Given the performance we have seen to date, we continue to believe that we will be able to grow our to top line in 2023, driven by our expanded product portfolio and ongoing improvements in execution as well as our strong customer renewal and retention rates. We believe the diversity of our customer base across sizes and industries and our focus on attractive growth markets should allow us to weather challenging economic conditions. Our outlook carefully takes into account macroeconomic conditions and the impact of our subscription first business model transition. We remain focused on our strategy and what we can control and are committed to continuing to improve our profitability profile in 2023. For the Q4, we expect total revenue to be in the range of $188,500,000 to $192,500,000 representing a 2% year over year growth at the midpoint.

Speaker 3

Adjusted EBITDA for the Q4 is expected to be approximately $80,500,000 to 82,500,000 representing 9% year over year growth at the midpoint. Non GAAP fully diluted earnings per share are projected to be to $0.22 per share, assuming an estimated 167,400,000 fully diluted shares outstanding. Finally, our outlook for the Q4 assumes a non GAAP tax rate of 26% and we expect to pay approximately $8,000,000 in cash taxes during the Q4. For the full year, we are again raising our guidance and expect total revenue to be in the range of $749,000,000 to $753,000,000 representing 4% year over year growth at the midpoint. This compares to the previously issued guidance of $740,000,000 to $748,000,000 in the initial range of $725,000,000 to $740,000,000 at the start of the year.

Speaker 3

We are again raising our full year adjusted EBITDA guidance to be between $322,000,000 $324,000,000 representing a 15% year over year growth at the midpoint. This is compared to the previously provided guidance for the full year of $308,000,000 to $313,000,000 We continue to make selective investments consistent with our priorities and remain very committed to improving efficiency and profitability. We remain focused on top line growth as we have made meaningful investments in our product portfolio and go to market strategies. We believe these investments are starting to pay dividends. Non GAAP fully diluted earnings per share is projected to be $0.83 to $0.85 per share, assuming an estimated 100 to 66,400,000 fully diluted shares outstanding.

Speaker 3

And finally, our full year and 4th quarter guidance assumes a euro to dollar exchange rate of 1.06:one. With that, I'll return the call to Sudhakar for his closing remarks.

Speaker 2

Thank you, Bart. I'm very pleased with the team's progress as evidenced by another strong quarterly performance on both revenue and adjusted EBITDA. Although our focus today is on the strength of our 3rd quarter results and the progress we have made as a business, I want to spend a few moments talking about the recently announced civil enforcement actions brought by the SEC related to the Sunburst attack. We find the SEC's allegations very disappointing And believe they are inconsistent with the facts. As difficult as the attack was, we are very proud of how our employees responded And their tireless engagement with our public and private sector customers, partners and other stakeholders.

Speaker 2

Through our secure by design efforts, we have endeavored to set a new standard in secure software development And Infrastructure Security and Approach has received broad recognition in the security and IT industries. We will continue to be outspoken advocates and promoters of public private partnerships to thwart and respond to cyber attacks. I believe this is the only way to improve cybersecurity for public and private entities. We are concerned that the SEC's actions will stand the progress we have made as an industry. To all of this and most importantly, we deeply appreciate our customers' recognition of the circumstances of the sunburst attack and the opportunity to enjoy greater relevance with them as evidenced by our growth and retention rates.

Speaker 2

We are working hard and making significant progress in our initiatives to deliver ongoing compelling value to customers via our subscription first mindset, build solutions to deliver the best time to value, the best time to detect issues And the best time to remediate issues in their multi cloud environment by a simple, powerful and secure solution And to expand our margins even as we deliver top line growth and evolve to a more predictable subscription revenues. The macro environment continues to present challenges to the broader software industry. Even so, I'm confident our strategy, Portfolio and customer success focus will appeal to customers across all geographies and across all verticals. We continue to exercise expense discipline, invest selectively and strive to deliver revenue, Growth and Expanding Margins. We are increasing our guidance for 2023 across total revenue And adjusted EBITDA, as you heard from Bart, on the heels of a strong Q3 and first half twenty twenty three performance.

Speaker 2

In fact, our revised low end of the outlook for the year is above the previously indicated high end of our guidance ranges on both total revenue and adjusted EBITDA. Again, I thank our employees, partners, customers and shareholders for their commitment to SolarWinds. Bart and I are now happy to address your questions.

Operator

Your first question comes from the line of Rob Oliver with Baird. Your line is open.

Speaker 4

Hey, guys. It's Patrick Schultz on for Rob this morning. Thanks for taking my questions. I guess, first starting with the larger customers of greater than 100,000 spend. This Cohort performed pretty well during the quarter and growth actually accelerated despite a continued challenging macro for larger deals.

Speaker 4

Just wanted to dive a little deeper into this. Just trying to understand some of the main drivers are and maybe some of the enhancements you made around the partner program. Are these starting to gain traction with the larger customers?

Speaker 2

I'll take a crack at that question and Bart, feel free to jump in and add your comments. First of all, yes, your observation is absolutely right. But as we have always described on these calls, We will expect some variability in large deals as we go through various quarters. But the reason why you're seeing this steady trend from us It's because we are continuing to deliver greater value to customers. One of the points I bring up consistently is that We are helping customers eliminate tool sprawl.

Speaker 2

What that means is that instead of us being simply a point product Solution provider, we are delivering platforms and broader capabilities to customers that then let them consolidate other vendors' to and other capabilities onto the SolarWinds platform. In fact, the hybrid cloud observability solution that's been gaining traction since we introduced That's exactly that, in addition to doing a lot of other things. So that's what's contributing to some of the larger deal sizes. The other point is what you highlighted, which is working with Global System Integrators and continuing to evolve our Transform Partner Program. We will see some more traction there, but it's not fully reflected yet.

Speaker 2

And this will be a long journey for us, but we are very excited about where we are headed.

Speaker 4

Great. Appreciate the color. And a quick follow-up too. Just want to ask about the public sector and some of the Fed customers. Your team has done a great job maintaining these relationships here.

Speaker 4

It seems like this vertical continues to be a nice pocket of strength. So can you talk about From the demand you saw during Q3, just given the federal September fiscal year end and maybe where do you stand now in terms of renewal rates, expansion activity, subscription progress, etcetera, just

Speaker 2

Yes, we are making very good progress there. And as you indicated, We have retained most, if not all our customers and have continued to expand as well with new customers in the public sector And especially the federal segment. That will continue to be a very important aspect of our business because our solutions Support federal government customers, in my opinion, as well or better than most other options out there. And that's the reason why they tend to be loyal to us And continue to expand with us. With regards to demand in Q3, we did see good demand, although I will say that towards the end of the quarter, especially on 30th 29th, because of some of the continuing resolution issues, We did have deals slip into Q4, with some of them we already closed.

Speaker 2

But that is a that was a soft spot for us in Q3 as we ended it. But as you saw from our results, even without those deals, We delivered excellent results above the high end of the range we provided, indicating the diversity and the robustness of our solutions across to all verticals and of course, federal as well.

Operator

Your next question comes from the line of Matthew Hedberg with RBC Capital Markets. Your line is open.

Speaker 5

Hey, guys. This is Simran on for Matt Hedberg. Thanks for taking our question and congrats on the quarter. Just one for me. Can you speak to the health of the SME market and how customer spending has been tracking?

Speaker 5

And I'd also love to hear any additional commentary around how you've been thinking about retention and expansion throughout the quarter relative to expectation and what is driving this trend.

Speaker 2

Thanks again for your question. I'll take a quick crack at responding to it And Bart will add any additional color he chooses to. Specifically on the SME sector, I have highlighted this previously as well, Which is while many of our customers may be on the mid market or mid sized range, technology is a must have for them And solutions such as ours will help them eliminate complexity, reduce their costs And improve their productivity. So in an environment where their complexity is growing, they do not have the resources, The human resources of very large enterprises. And at the same time, they tend to be fairly capital rich.

Speaker 2

And so they invest in solutions like ours, We are seeing very robust demand in our mid market customers. The variability as we have highlighted previously He's on the large enterprise segment because deal cycles are requiring more approval and tend to take a bit longer to accomplish. The beauty of our business is that we are very, very diversified. And so we are able to get through these macro conditions And still deliver very predictable results.

Speaker 3

Yes. And on our renewal rates, we talked about the fact that our renewal rates actually got back to some of our all time highs. I think our end quarter renewal rate was actually at 96%. And on a trailing 12 month basis, Our renewal rate was up to 95%. So really strong traction just shows goes back to what Sudhakar talked about as far as The strength of our customer base and the loyalty of our customer base and how much they like our product.

Operator

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

Speaker 6

Yes. Thank you for taking the question and congrats on getting back to the Rule of 50 financials. Given, Sudhakar, what talked about momentum with the observability portfolio ITSM and database. I was wondering if you could sort of disaggregate the improvement in sort of net new ARR between sort of migrations and how this sort of growth portfolio, how much of that is contributing to your net new subscription AR results.

Speaker 2

Sajid, thanks again All your questions and your continued support of SolarWinds as well. What we are looking at, When we talk about migrations or conversions, in almost not every instance, but a majority of the instances, It's not just a claim conversion as I described previously, which is we don't simply give up maintenance dollars and convert them to subscription of CEO or our observability solutions or database or service management for that matter. In almost Many situations what happens is that the customer is also expanding with us. This is the consolidation of tool sprawl or reduction of tool sprawl, Improvement in alert stacking capabilities, getting them ready for the cloud and so on. So even when we say migration or conversion, there's an expansion involved.

Speaker 2

And then separate from that is what we call completely new deals. These new deals can be cross sell of observability, let's say, into database of service management customers or net new to franchise, which are deals that We may have displaced a competitor because we are more modern and more cloud ready for that customer. So we segregate internally between conversions as well as new. And we are seeing robust growth in both dimensions, but we don't really split out those financials externally.

Speaker 6

Understood. And then maybe we go back to just some of the your comments on SMB. If we think about the business across geos, if you look at how the SME business performed, was there any sort of seams there between North America, Europe, APAC or would they sort of you saw broadly consistent trends across the region?

Speaker 2

It's broadly consistent, Sanjit, notwithstanding some of the macro challenges that we are facing In EMEA due to all the reasons that wars and economies and so on and so forth. But even there, Our overall transaction count is actually increasing. So which is an indication of the robust demand environment that we are there and the And the reason why I highlight the whole SME angle or the mid market angle is Conventional wisdom would say in these situations that you will face a lot of pressure because of lack Traction or ability to invest from those segments and large enterprise, so to speak, is okay. We believe based on our experience, the exact opposite is true, which is large enterprise deals and larger deals in general take a little bit more time, more approvals in place, more scrutiny. So delayed cycles as you've heard from many different software vendors.

Speaker 2

And that's where a focus on both mid market and selective enterprise allows us to drive very diversified results.

Speaker 6

Understood. Thank you for the color.

Operator

Your next question comes from the line of Terry Tillman with Truist Securities. Your line is open.

Speaker 3

Great. Good morning. This is to Conor Bessel on for Terry. Thanks for taking my question. Just one for me, curious on the new ESM product.

Speaker 3

You recently announced, Curious how the initial reception has been amongst your customer base and maybe how we should think about the profile of a typical customer that will look to deploy ESM across different departments in their organization,

Speaker 2

Yes. So previously, our solutions were largely focused on the IT department. With ESM, we of course can traverse interdepartment. But in terms of the sweet spot of our customer, I would say that it's Still call it the mid market customers, including the upper end of the mid market, where the CIO has a significant role to play in deciding the technology solution and the stack across the organization. Great.

Speaker 2

Thank

Operator

you. Your next question comes from the line of Kash Ranjan from Goldman Sachs. Your line is open.

Speaker 7

Hey, guys. This is Jacob Staff on for Kash. Thanks so much for taking the question. Really solid results, so really good to see that continued execution. So just one or 2 for me.

Speaker 7

First one being I realize that guidance has been raised Sudhakar, I think you put it well how the low end of the new fiscal year guidance is above the high end of the initial fiscal year guidance. So that being said, do you how much potential to the upside do you think there could be in 4Q given that That's typically when budget flushes occur and companies might be a little bit more willing to spend just given uncertainty on budgets heading into next year.

Speaker 3

Yes, Jacob, I will tell you that sorry, Sudhakar. Yes, Jacob, I'll just start off and then Sudhakar, you can come in after that. Yes. I was just going to say, Jacob, when we set Q4 guidance, we kind of followed a similar methodology that we did for setting to both the full year guidance back in February as well as the updated guidance that we provided last quarter. There's a lot of macro headwinds right now, so we're trying to be somewhat cautious when we're providing guidance.

Speaker 3

But the plan is for us to try to exceed that number. But obviously, there's a fair number of factors at play right now.

Speaker 7

Awesome. Okay. And then just last Is there any specific vertical that you might call out that showed maybe outsized strength or weakness in this last quarter?

Speaker 2

No, Jacob. We had, I would say, consistent results across all the verticals that we participate in. As you know, we are a super diversified company when it comes to both customer count as well as vertical. And then, of course, we had the, call it traditional traction in Fed that you would expect in Q3, notwithstanding some of the government shutdown related issues.

Speaker 7

Got you. Okay. Thank you so much.

Operator

There are no further questions at this time. I would like to turn the call back to Sudhakar Ramakrishnan.

Speaker 2

Thank you very much again. With this, we conclude Q3 earnings call. And I appreciate everyone attending, Asking your questions and supporting Sullivan.

Operator

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

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