Apr 29, 2014
Executives
David Hafner – Director, IR Kevin Thompson – President and CEO Jason Ream – EVP and CFO
Analysts
Aaron Schwartz – Jefferies LLC Stewart Materne – Evercore Partners Inc. Gregg Moskowitz – Cowen and Company, LLC Keith Weiss – Morgan Stanley Scott Zeller – Needham and Company Gregory McDowell – JMP Securities James Moore – FBR Capital Markets & Co.
Robert Owens – Pacific Crest Securities
Operator
Good afternoon. Welcome to the SolarWinds’ First Quarter 2014 Earnings Call.
Today’s conference is being recorded. All lines have been placed on mute to prevent any back ground noise.
After the speakers’ remarks there will be question-and-answer period. At this time I’d like to turn the call over to Mr.
Dave Hafner, Director of IR. Please go ahead, sir.
David Hafner
Thank you, Stephanie. Good afternoon, everyone, and welcome to SolarWinds’ first quarter 2014 earnings call.
With me today are Kevin Thompson, our President and CEO; and Jason Ream, our Executive Vice President and CFO. Following prepared remarks from Kevin and Jason we will have a brief question-and-answer session.
Please note that this call is being simultaneously webcast on our Investor Relations website at ir.solarwinds.com. Please remember that certain statements made during this call, including those concerning our financial outlook for the second quarter and full year 2014, our growth opportunities and expectations, areas of strategic focus and investment, our market opportunities and our product development initiatives are forward-looking statements.
These statements are subject to a number of risks, uncertainties and assumptions described in our SEC filings, including our Form 10-K for the fiscal year ended December 31, 2013, which was filed on February 14, 2014. 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. 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. Our use and calculation of these non-GAAP financial measures are 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.
Each non-GAAP item in our forward-looking financial outlook that we will provide today has not been reconciled to the comparable GAAP outlook item because we cannot reasonably or reliably estimate future adjustments such as stock-based compensation expense which is dependent on our stock price at the time. I’ll now turn the call over to Kevin.
Kevin Thompson
Thanks, Dave. I am pleased to report that we had a fast start to 2014.
Total revenue for the first quarter of 2014 came to 32% reaching $95.9 million exceeding the high end of our outlook for the first quarter. And consistent with our past track record our revenue out performance in the quarter translated into operating margin out performance as our first quarter non-GAAP operating margins of 42.5% also exceeded the high end of our outlook.
In addition to the strong total revenue growth in the first quarter we also delivered solid year-over-year license revenue growth of 18% and our recurring revenue for the quarter increased by 41% reaching a record $59.6 million. Recurring revenue increased to 62% of total revenue in the first quarter up from 59% in Q4.
This increase as a percentage of revenue is despite strong license revenue growth in both the fourth quarter of last year as-well-as the first quarter of 2014. Looking forward we expect recurring revenue to continue to grow as a percentage of total revenue, driven by strong growth in our current recurring revenue streams and our belief that it will likely add to our current portfolio of subscription-based products in the future.
I’ll now take you through some of the highlights from the first quarter. New business sales which was comprised of new license and new subscription sales grew 26% in the first quarter led by stronger than expected performance from EMEA, Asia Pacific and U.S.
Federal. We also had a very strong quarter of recurring business bookings which is comprised of maintenance and subscription renewal bookings reflecting year-over-year growth of 44%.
We have consistently driven customer retention rates which we believe are best-in-class across all of our core product areas and geographies. We believe we’ve been able to accomplish this through a combination of our relentless focus on delivering high quality and frequent product updates to our customers and through the commitment of our customer retention team to leaving no customer behind.
Leading into the details of our first quarter results we were pleased to see accelerating growth in several parts of our business that have been focus areas for our teams. From a regional point of view our EMEA team kicked off 2014 in good position to deliver a strong year of growth with performance which exceeded our expectations in the first quarter.
New business growth sales at EMEA accelerated to 35% in the first quarter of 2014 compared to 22% in the fourth quarter of 2013. We believe that our business momentum across EMEA is building and that several large uncapped opportunities remained for us to attack.
We also believe that after a lot of effort over the last several years we’ve assembled a strong EMEA sales organization which understands how to successfully execute our unique go-to-market model. In addition we’ve made improvements to our EMEA demand capture engine which we’ve begun to provide a higher level of quality demand.
We also got off to a solid start to 2014 in the Asia Pacific region. New business sales exceeded our expectations in the quarter growing by 41% year-over-year as the organizational and structural changes we made in the first quarter in the Pacific portion of the region drove an improvement in the team’s performance in the first quarter.
In addition our Asia team and APAC MSP team both continue to experience strong growth quarters in the first quarter of 2014. Following improved performance in the fourth quarter of 2013 our U.S Federal business had a very strong growth quarter in the first quarter of 2014 with U.S Federal new business sales increasing by 53% on a year-over-year basis.
We feel good about momentum we’ve created in U.S. Federal and we’re now focused on carrying that momentum through the end of the U.S Federal government’s fiscal year on September 30, 2014.
North American commercial new business sales grew by 19% year-over-year in the first quarter of 2014 led by solid performance for our installed base and MSP sales teams. While we had a good North American new business sales quarter we believe the opportunity exists for us to meaningfully accelerate growth in this part of our business in future quarters.
Over the last 120 days we’ve begun to put together the pieces of Gen2 of the SolarWinds demand capture engine including the addition of several strong leaders with backgrounds at high transaction volume web-based business models. Laying the ground work for accelerating and maintaining North American commercial new business sales growth at a consistent level greater than 20% is one of the major areas of focus for our global marketing and North American sales leadership teams.
Turning to the product deals of our first quarter 2014 performance, to start total core product new license sales increased by 14% in the first quarter of 2014 as compared to the first quarter of 2013. First quarter new license sales of our portfolio core network management products grew by 23% across EMEA, Asia Pacific and U.S Federal which reflects a meaningful sequential acceleration in growth compared to the fourth quarter.
This acceleration was partially offset by lower growth in North America commercial network management sales during the first quarter. Importantly though we were pleased to see that our largest and most significant core network management products including SolarWinds Network Performance Monitor, NetFlow Traffic Analyzer and Network Configuration Monitor performed well across all geos including North America during the first quarter.
Within our portfolio of systems management products we had another good quarter of new license sales growth of our flagship systems management product, SolarWinds server and application monitor led by strong growth rates in EMEA and Asia Pacific. We also had our second consecutive strong quarter of year-over-year growth for SolarWinds Virtualization Manager which is benefiting from what we believe is an uptick in demand for powerful yet affordable tools to manage this slew of virtual machines that have been deployed in organizations of all sizes over the last several years.
SolarWinds Database Performance Analyzer which we added to our product portfolio through the acquisition of Confio in October, 2013 performed within the range of our expectations increasing by 15% as compared to the first quarter of 2013 which was obviously prior to acquisition of Confio. However database performance management sales were down sequentially by approximately 31%.
The point that excites us related to the performance of our database performance management product in the first quarter is that we’ve made progress more rapidly than expected at driving much higher daily download volume for SolarWinds Database Performance Analyzer which we believe will result in an increase in transaction volume and velocity in future quarters. This is a very positive indicator of the future growth opportunity for this product line in its fit within our go-to-market model.
We continue to believe that there is a large and growing market opportunity in the database performance management that database performance management will be critical to managing the performance of future cloud based applications and then we’ve added the right product and the right team to allow us aggressively capitalize on these opportunities. In addition during the first quarter DameWare which as you likely remember was a drag on our overall growth in 2013 generated single digit year-over-year growth.
We also have an exciting new DameWare product release plan for later in 2014 which we believe will increase momentum for the DameWare product line. This gives us confidence that the most difficult year-over-year quarterly comparisons of DameWare are now behind us and we expect DameWare to contribute to our new business growth in 2014.
Finally to close out the discussion of product performance we had another strong quarter of broad based growth in our MSP business with total MSP revenue reaching $8 million in the first quarter of 2014. Our MSP growth was led by new subscription sales at EMEA and APAC in the first quarter, however we had solid performance across all regions which contributed to our strong first quarter results.
We feel the momentum we are seeing at our NSP business reflect the positive impact of the investments we have made in accelerating awareness of the enabled brand. We are growing interest among MSPs in utilizing the platform to manage the IP assets of the rest of SMB customers and continue growth in the SMB markets that the MSPs serve.
As a result of those factors we drove another quarter of record new subscription bookings which increased by 10% sequentially of a very strong performance last quarter. I will now turn the call over to Jason.
Jason Ream
Thank you Kevin and good afternoon to everyone on the call. Before I get into the details I just want to hit on our few financial highlights.
As a result of strong new business sales we delivered solid growth in license, subscription and maintenance revenue in the first quarter. License revenue totaled $36.4 million increasing by 18% versus last year.
Maintenance revenue continued the strength of recent quarters reaching $54.9 million and delivering year-over-year growth of 30%. Maintenance revenue increased by $1.3 million from Q4 ‘13 to this quarter Q1 ‘14 despite two less days in Q1 than in Q4 on which we are able to recognize revenue in our daily resignation model.
Subscription revenue continue to ramp nicely reaching $4.6 million for the first quarter despite an over 3% decline in the Canadian dollar exchange rate during the quarter reflecting sequential growth 19%. And in total our recurring revenue consisting of maintenance and subscription reached 62% of the total representing a record high for SolarWinds even though as Kevin mentioned we’ve had two consecutive quarters of strong license revenue growth.
Lastly our non-GAAP operating margin up 42.5% exceeded our guidance by 1.5 points driven almost entirely by revenue outperformance as our operating expense in the first quarter were consistent with our investment plan. I’ll now run through the business metrics that we have committed to provide on a quarterly basis.
First total revenue by product group, total revenue for our network management products was $58 million representing 13% year-over-year growth. Total revenue for our systems management products was $30 million representing 40% year-over-year growth.
And finally total revenue for MSP products was $8 million. Revenue and MSP group is up approximately $200,000 from Q4 with subscription revenue growing nicely partly offset by a decrease in license and maintenance revenue as we transition the MSP business to a focus on subscription as well as the unfavorable variability in Canadian to U.S.
dollar exchange rate. Second our core commercial license transaction volume grew by 4% year-over-year was newly flat with last quarter a positive sign after a very strong Q4.
Average core commercial license transaction size was $7,700 in Q1 representing 9% growth over Q1 of last year and was within the range of our expectations for the quarter as well as at a level with which we are comfortable. Average transaction size decline sequentially from Q4 which is consistent with our historical trends.
We expect average transaction size to generally increase throughout the course of 2014 consistent with our historical patterns and also driven by some of the new product releases that we expect to deliver the later in the year. As Kevin indicated in his remarks we had very strong performance in both our AMIA and Asia Pacific businesses in the first quarter that contributed a year-over-year international total revenue growth of 36% while North America increased by 30% with the strongest sales growth contribution in North America coming from our U.S.
Federal and MSP businesses. For the quarter revenue from North America was 72% of the total and revenue from international increased to 28%.
Our install based sales team continue to perform at a high level in the first quarter delivering year-over-year growth of 201% driven primarily by aggressive expansion of this team both in North America and in EMEA. As you probably remember we began the expansion of this initiative in the second quarter of 2013 so well we expect year-over-year growth to begin to slow a bit on a percentage basis in the back half of 2014 due to stronger prior year comparison, we still believe that this initiative can be a long term growth driver for us.
As far as our operational focus during the quarter we continue to make investments in the core business as well as work towards the strategy road map that we laid out at analyst day bridging on premise and clouds technology, IC infrastructure and applications and downloadable license software and software-as-a-service delivery. We maintained our increased investment in product development with a number of exciting releases of products we expect to come out over the next several quarters based on the step up in product development spend that we began in Q3 of last year.
Our marketing team continues to refine the capture demand both on our website as well as through other online media and our product marketing teams are making solid progress and expanding with discussions around the IC management problems that we can solve for IC products. Our sales team strengthen by the management adjustments we made last year has maintained a careful focus on hiring and retention keeping the team staff at planned level.
We will continue to increase the size of our global sales team over the remainder of 2014 at a pace consistent with our revenue growth. We have ramped our investment in our support organization reflecting I believe the customer experience especially in our direct to the IP pro relationship model is of critical importance.
And lastly we have been growing our investments in our financial and operational back office functions as we prepare the company have the growth that we believe we see ahead of us. We have made these investments while maintaining best-in-class Non-GAAP operating margins with our results each quarter exceeding expectations for non-GAAP operating margins reflecting the unique leverage and the ability to generate outside profit delivered by our go to market model.
Our approach continues to be based easy to use products that real means of technology practitioners, online marketing, inside sales and a frictionless interaction model. We continue to expect that when we outperform on the top line we will see corresponding upside in our operating margin as we have very low cost for each incremental dollar of revenue in a quarterly period.
To give you an update on hiring during the quarter we had at 45 employees bringing our worldwide total to 1,357 at the end of the quarter hiring was spread across all major functions as well as our key offices. Turning to the balance sheet we ended the quarter with $232 million in cash and investments split between approximately $112 million held in the U.S.
and the remainder international. Our total cash in investments increased by approximately $36 million during the quarter comprised of cash flow from operations of 42.6 million to our 44% of revenue driven by strong cash collection partially offset by annual companywide bonus statements made in March 2014 for 2013 performance and by approximately $3 million in share repurchases made on to the buyback program that we put in place last summer.
On our cash flow statement however you will note some moving pieces including approximately $6 million of capital expenditures which is obviously higher than you would expect to see in a typical quarter. Most of that 6 million is related to build out of our new headquarters facility in Austin.
And of the total $3.1 million reflect tenant improvements that are actually paid for by the landlord of which we are required to account for as capital expense. I want to point out however that there is no actual cash outflow associated with the $3.1 million portion and as such there is an offsetting increase in our other long term liabilities accounts which will be depreciated over the 13 years I believe.
While we are on that topic I’d like to give you a quick update on our facilities around the world. We are currently in the middle of moving into our new headquarters building in Austin we are leaving we are getting to the pretty meaningful overcrowding in the building we have occupied for the last six years.
We are also finishing to build out and moving into new larger facilities to accommodate the growth that we are seeing in other offices around the world. I want to highlight that the increase in rent expense related to this office expansion which totals approximately $700,000 per quarter is included in our operating expense forecast for the remainder of 2014.
Now I would like to take you through our outlook for the second quarter and full year of 2014. For the second quarter we expect total revenue to be in the range of $96.5 million to $98.5 million, representing 24% to 27% growth over the second quarter of last year.
We expect to generate non-GAAP operating margins in the range of 40% to 41% consistent with our outlook for the last several quarters. And we expect a non-GAAP tax rate of 27% and 77 million weighted average shares outstanding to drive non-GAAP earnings per share of $0.35 to $0.37.
For the full year of 2014 our total revenue outlook increases slightly to $409 million to $421 million, reflecting 22% to 26% year-over-year growth. The increase in our outlook is based on the revenue outperformance in Q1 partially offset by weaker than expected Canadian U.S.
Dollar exchange rates negatively impacting our MSP business. Our revenue outperformance in Q4 of 2013 and in Q1 of 2014, coupled with our stronger than expected license revenue growth in each of those quarters gives us greater confidence in our business.
However we will continue to take a cautious view in our outlook as we believe that the impact of the number of the initiatives that we kicked off late in 2013 are still to come. And in many cases will take several quarters to fully materialize.
Until we see the positive impact from these initiatives that we expect over a period of several quarters we are not including their effect in our outlook. We are raising our margin outlook for the year slightly to 41% to 42% based on the outperformance in Q1 and the revenue ramp in the back half of the year that we currently expect to lead the margins slightly above the level of our Q2 outlook.
For the year we expect the non-GAAP tax rate of 27%, 77.2 million weighted average shares outstanding and non-GAAP earnings per share of $1.60 to $1.70. With that I’ll turn it back to Kevin.
Kevin Thompson
Great Jason. I’m extremely pleased that we got off to much faster start to the year in 2014 than we did in 2013.
We have worked very hard to build momentum and improve our execution across many areas of our business over the last several quarters and believe that we are beginning to see the positive impact of those efforts in acceleration in our total revenue, license and subscription growth rates over the last two quarters. We also believe that we yet we have yet to begin to the impact on a meaningful portion of the incremental investment in our business that we kicked off during the second half of 2013.
As we’ve indicated previously we have invested in products and business infrastructure which require time to complete and the additional time to begin to have a positive impact on our performance. We expect to see benefits from these initiatives begin to positively impact our growth over the back half of 2014 and in 2015.
I believe this strong start of 2014 sets us up for a year of solid growth and will allow us to focus on a number of important and exciting initiatives for our business over the remainder of the year. On our February conference call I discussed some of the key product initiatives that we are working on.
On the network management side of our business they may include first, network centric APM, second operational insight and root cause analysis which includes global search of unstructured data. Third, advanced troubleshooting and remediation and finally bringing in device and mobile visibility.
We’re still on track with these initiatives and expect to bring a number of these capabilities to market before the end of 2014. We are excited about the potential in these network management product releases have to accelerate the growth of our network management business as we meaningfully expand the number of network related performance problems we can solve for IT pros.
We plan to continue to invest aggressively in our network management business to drive a meaningful increase in the number of new network management customers we’re adding each year and to more rapidly penetrate the very large opportunity that we believe exists in our installed base for our network management products. To our acquisition and product and development strategy, over the last two years we’ve significantly increased the number of systems and applications performance problem that we can solve for IT pros.
This rapid expansion of our systems management project line coupled with the work that we have done to increase the awareness of the broad range of systems and application management problems that we can solve for IT pros has allowed us to drive growth in this part of our business that it has been in a much higher rate than the systems management market has been growing. In 2014 we’re focused on expanding the capabilities of our systems management product portfolio and more deeply integrating niche products with each other and with our network management products to provide easier and faster cross-sale into our customer base.
As a part of this work we plan to extend our application management capabilities through a combination of international development and acquisitions to make progress toward our stated goal of managing all things IP without regarded to the location of the application or the management resource. Our 2014 key product initiatives for our systems and application management product portfolio are, first is application insight.
We are seeing early success with the application visibility capability we added to server and application monitor during late 2013 and early 2014. This functionality provides visibility for IT pros into the performance of specific package applications such as Microsoft Exchange and Oracle databases.
We expect to grow each visibility into additional widely used packaged applications during 2014 and believe this capability will drive additional interest from IT pros in solving server and application monitor and will also increase usage of SAM by our existing customers which will create sizeable great opportunities. Second, visibility in distributed and hosted IT environments.
Third application stack integration and visibility and finally cloud management, which is an emerging area however when we believe provides a large incremental market opportunity for us. We see both short term and long term opportunities in cloud management and we’re focused on initiatives designed to enable us to capitalize on these opportunities.
In summary we’re focused on executing an aggressive product strategy which is aimed at allowing us to rapidly expand the number of problem we solve for IT pros while at the same time rapidly improving and extending the products in SolarWind that our customers are currently using. We believe that this approach will allow us to add new customers at increasing pace while at the same time capitalizing on the installed base opportunity that we currently have and that is literally growing each day.
In addition, we plan on quickly adding capability that allow us to manage the emerging hybrid cloud, IT infrastructure more effectively than any other provider of IT management software. We believe we are the best efficient company in software to provide performance management solutions, which take advantage of the changes that are currently happening and the changes that we believe will come into future in the architecture of IT infrastructure.
We intend to provide performance management products that creates a bridge between the infrastructure of today most of which will never go away and which we believe will continue to grow and the infrastructure of tomorrow which a number of new applications were utilized. With that we will open up the call for questions.
Operator
(Operator Instructions). And we go first to Aaron Schwartz with Jefferies.
Aaron Schwartz – Jefferies LLC
Thank you. Kevin I actually both you and Jason sort of concluded it you have to see the impact from a number of initiatives that you took in the second half.
I know you sort of covered some of that on the product side there with your closing remarks. But I was wondering if you could sort of walk through maybe the timeline of some of the things that you would expect to hit sooner than maybe some of the things that are further out.
And then if you could – sort of multipart question here, if you could sort of on the product side walk through whether we would expect to see incremental growth on the license side, I know you’ve talked about increasing subscription revenue overtime. And then lastly are there other operational initiatives that you haven’t seen the impact from yet either, thanks.
Kevin Thompson
Again, I’d like to keep all those straight in trying to all three of those questions so first maybe let me set the context for you. The things that Jason and I talked about both on the product side, and on the business infrastructure side, we will begin to see the impact of that as we move through the rest of this year and into next year.
There will be some improvement and particularly on the business performance side as we add new system capabilities insights into our business and we’re to get a little bit more of that each quarter as we move forward that we think will allow us to execute more effectively than we’ve been executing. I think we made really great progress over the last couple of quarters, the execution has been consistent.
It’s been the most part better than we had expected. So I feel good about where we are.
Where we’ve been doing a lot of work to make sure that continues to improve. And so you can expect over Q2, Q3, Q4 even into next year that some of the work we’re doing in the system side whether that’s marketing systems, whether that is work we’re doing on our website whether those things that we’re doing on the analytics side that will begin to have a positive impact as we move through the year.
But as Jason indicated we’re really not building in that into our outlook until we start to see it happen. On the product side you should start to see some new products come to market as early as this quarter and we got some that we got planned and we’re not gone talk about specific products.
We have got some product releases planned for the second quarter. And you should see additional product releases in Q3, Q4 and early next year that are all a result of the additional investment we made in products beginning in back half of 2013.
So there will be, it’s not a big bang it instead will be a gradual stream of activity that you should expect to see pick up as we move through the back half of 2014 and into 2015.
Jason Ream
And on the product side in particular Aaron, you know that Kevin said we’ll have some more leases coming out this quarter that are specifically driven some of the features in the timing as a result of the increase in spend, but the investment we are making will have years of impact right because that product gets out in the market, create a word of mouth awareness circles back to other customers coming back to us, the next release builds on that et cetera. So think of that is as we’ll start to get some benefit from that specifically this quarter but the long term impact will should benefit us for years.
Kevin Thompson
And in terms of other operational initiatives which were your questions, now the area where I think we are spending the most time is around the demand capture and we talked about that a lot over the last three or four quarters and we’ve definitely been doing a better job of increasing the level of high quality demand that we are capturing. But that’s where we are implementing new systems, that’s where we have built new added capabilities to our team.
So [Stewart Seth] and John Rizzo who you remember joined our team back in November are leading that charge and I think they’ve done a really nice job of bringing new expertise into the organization, of beginning to implement some of the technologies they believe will give us increased visibility and a better ability to nurture some of the demand that we capture and turn that eventually into higher conversion rates for our sales team. So that’s quite a single largest initiative we’ve got under way other than the work we are doing on the product side to make sure that we are really creating a lot of excitement around our network management products and we are continuing to move our system management products forward at the pace we have been moving them which have been pretty quick.
I think the last question you had maybe the middle question was around license revenue growth and we are not giving you an outlook specifically on license revenue given kind of the way the mix has been shifting we do expect our license revenue to grow and continue to grow and we fully intend to have it grow at a faster pace than what we are seeing. So I feel pretty good about what we’ve been in Q4 and Q1.
I am never satisfied but I feel like we are making the progress we ought to be making we definitely accelerated those growth rates compared to what we saw in the first three quarters of 2013. So the comments around returning revenue is that one just in the way our model works recurring revenue will naturally grow faster mathematically to license revenue because every dollar discount we give on the license side we are going to build we are going to defer that to maintenance revenue and build list maintenance and just the way our model works.
We also have added additional subscription based revenue stream with enable and as we look forward and look at the way we believe the IT world is going to begin to take shape we’ll still have a bunch of license based technologies we believe we’ll have more subscription-based technologies than we have today. May be not more subscription-based technologies and we do license-based technologies but definitely more than we have today which should naturally cause that to shift a bit.
Aaron Schwartz – Jefferies LLC
Great and if I could just sneak a quick one in here. Given there is still assuming lot to come here and you still put up sort of to pretty close to your 20% license sort of early in a quarter.
Can you just comment on where sales productivity ended up for the quarter? Thanks.
Kevin Thompson
So sales activity was solid, it was really strong in EMEA and Asia Pacific where we had really strong quarters, really good in U.S. federal.
It was pretty good in North America. We think it can get a little bit better in North America but we’ve been adding capacity as you know pretty quickly.
So it was solid and right in the levels we expected to be and better within where we were early in 2013 to review we made progress in Q4, maintain that progress in Q1 and yeah we can stay at the levels we are now and just add [inaudible] would I have be satisfied, no I just said if it was but it would be okay. I think we can actually continue to add reps and actually bring that productivity up a little bit more but you can tell by our margins that it came in a little better than we thought it would.
Operator
And we’ll move to our next question from Steve Ashley with Robert W. Baird.
Unidentified Analyst
Hi, thank you this is [Chetan] for Steve Ashley. You know just wondering how do you think about the ability of the sales and the marketing teams in terms of managing the number of products you’ve added recently and then these new products coming in later this year.
Do you feel that they have the capacity to take on more products or is there anything that you can do now to make sure that they can handle the pace of innovation that’s going on?
Kevin Thompson
Yeah. So we actually we’ve already been really working toward making sure we have the capability to handle that.
So one thing as I indicated was that we have made investments in our demand duration team that we brought some people in from the outside that have great experience in high transaction volume with these models. So we are investing both on the demand capture side, so we can handle more products we’re also investing at our product teams As Stewart Seth runs those teams and he had added a number of folks to those teams will continue to add people as we add product.
But I feel good about the capacity we have and our ability to handle more products then we have today. I think we’ve earned a lot over the last year as we’ve added products rapidly.
Some of that we’ve done well and some of that obviously we haven’t done as well we would have like the thing that we are improving every quarter and feel good about where we are. I feel really good about the leadership team I have in place right now on the product and marketing side and our ability to handle the growth of the company.
The great think about a lot of us riding is within our core market they are in network management, so lot may be a new product and new capability in network managements we have been in net network management for over a decade. They are in systems management and they are in kind of core sever application virtualization management to feature the functions we are going to add that.
We already have footholds in those markets, we have awareness in those markets. So it’s not like all the products we are going to bring are brand new to us where we have to create new relationships with potential IP pros, these are markets for the most part we understand, we’ve been in and so I feel good about our ability to continue to expand our product capabilities.
Unidentified Analyst
Great. And if you know just a follow up if I look at the second quarter revenue guidance here, the low end of the range with just license revenue might actually decelerate year-over-year and we actually have an easier comparing then 2Q.
But one I just wanted to confirm that I have my math right there and two just wondering if that’s basically a greater level of [inaudible] or is there anything else we need to take into account there?
Kevin Thompson
So I’ll support your question I will let Jason’s add. So as far as we look in Q2 yeah we feel confident about the things we’ve been doing.
We feel good about the overall growth that we are going to deliver we are ready to talk to you just a little bit after raising our year end on the February calls we’ve raised – look at our view of the year on the last two calls. So I feel very good about the team we’ve done on the field and the improvements we made in our business and the things that I see common and as Jason indicated that we really haven’t put a lot of impact into our outlook from a lot of the things we have that will hit later in the year.
And we really want to see them hit through the impacts that they have as we move forward. We are generally cautious about the second quarter for whatever reason the calendar second quarter tend to be one that is a little bit more difficult for us as for our growth rate has historically we look back over the last three or four years bit a little lower than the other quarters and we have kind of built that into our view.
So there is nothing that we see that says that has to be the case. I think we are just trying to be prudent based on what we’ve seen in the past and as I said now get out of our sleeve.
Unidentified Analyst
All right. Well thank you very much.
Operator
We move next to Kirk Materne from Evercore.
Stewart Materne – Evercore Partners Inc.
Thanks guys. Just real quickly get Kevin I don’t want to read too much into your comments but sounds like Europe and Asia Pac was clearly sort of ahead of what you guys are expecting.
I guess just to clarify was North America pretty much on plan or is that on the commercial side was that perhaps a little bit slower? And I guess if it was, was it just puling on another new resources and getting those guys get ramped up this quarter?
Or is there anything different in the environment than versus what you are expecting?
Kevin Thompson
We look at North America in total it was within the range of where we expected it to fall, it definitely wasn’t at the high end of the range. So within in the bounds of what we expected, I had hoped we do a little bit better.
And I think we can and will grow faster North America as we move forward. So I just want to make sure we are focused on it.
If you remember if you walk back a couple of quarters our real focus was international and then Asia wasn’t growing as fast we wanted it to, Europe wasn’t growing as fast we wanted it to and we had really strong quarters in both of those regions. North America had nice solid quarter and did well but it can definitely perform a little bit better but also we came off a really strong fourth quarter North America where the team executed incredibly well and that came into the first quarter with a little lower pipeline than we definitely walk into a quarter with.
So we knew that that we are going to see a little lower growth in North America in the first quarter then fourth quarter just given that. So I feel good about where we are, feel good about what we see in we got a really strong management team in North America so I feel very positive about what we are going to see as we move forward.
So it was good I won’t call it great but it was good.
Unidentified Analyst
Okay. And just may be on EMEA and Asia Pac.
I guess given those regions have been historically a little bit choppy for you guys than it’s in your last year. I guess sort of what does the guidance implies for those regions or was this quarter somewhere above justifies upside and you are sort of expecting perhaps not as much from those guys I mean outside the price perspective and the guide.
I am just curious I guess you feel convinced that those regions in particular are back on a path so that they will be more consistent I guess quarter after quarter going forward. Thanks.
Kevin Thompson
So you got to listen back to my remarks. In Europe I feel really great about the sales organization that we’ve built over the last couple of years.
We’ve got a young guy over there to the last three years to really build that team and would let him come home and to we build a great team let me – come home because it will be right team. So we are back in Texas now as part of the North American team which is one of the reasons I feel very confident about our North American Sales leadership team.
So I think EMEA is set up to be very consistent as we move forward and continue to deliver strong growth. On the APAC side we’ve got a very strong and mature team in Asia which is and then in the Pacific part of the region which is mainly Australia and New Zealand we make some organizational changes send a young person guy from over here to lead that sales team.
I think we’re doing the right thing. So I think we’re set in Asia to be consistent in terms of our growth.
I’d say in Pacific we still have a little maturing to do. And that’s kind of built into our view.
I’d also say that as you look at our outlook, we haven’t built into our outlook for the remainder of the year growth level for those regions that are as high as what we saw in the first quarter. Hopefully we can deliver that, but I don’t think it’s the right thing yet to build that into our view at the rest of the year.
So hopefully we’ve got some upside there, but time will tell.
Unidentified Analyst
Great, Thanks Kevin.
Kevin Thompson
Thanks.
Operator
And we go next to Gregg Moskowitz with Cowen and Company.
Gregg Moskowitz – Cowen and Company, LLC
Thank you very much and congratulation on a good start to the year. A lot of my questions have been asked, but I wanted to ask about the recent [diligence] which was with NetSuite.
And if an impression wouldn’t for you guys is that then it looks like it effectively expand across all of your major products. And I guess to the extent possible I’m wondering if you could talk about the expected timeline for deploying your products with this particular customer.
And then just more broadly and more importantly does this have enough potential for other holistic IT management deals going forward. How do you sort of how do you do that?
Kevin Thompson
Yes. So first what I’d say is it wasn’t kind a one transaction deal.
We almost never do those, Net suite is brought a number of our products over the year and so for they haven’t got to the pin that they have accumulated large volume and technology to SolarWind and we’re managing everything from their internal IT infrastructure to their datacenters that are over their applications set to delivering services to customers around the globe. So it’s a very good example of how we grow within organization how we make an initial sale that’s turn into a number of additional transactions whether that’s 9, 10, 20, 30 transactions to become a critical part of how we manage our IT infrastructure.
The other thing I would say is we absolutely do believe that there is an opportunity that’s opening up because of the enhancements we made to our product for us to become and begin to be much more successful than we have in the past. By selling to a lot of these fast base companies out there, companies that are building applications and delivering those applications to 100,000 or 10,000 of customers all over the world as a service.
And while we’ve manage their internal IT for a long term we’ve not made huge inroads into managing their datacenter where their critical applications live that they are delivering out to their customers and with the lot of the improvements we’ve made so if there is management product portfolio as well as the improvements which includes things like application insides and some of those functionality as well as the improvements we’ve made during our management product portfolio. The enhancements we’ve made to our virtualization management product are much more compelling to those organizations now.
Really do I expect as to do a holistic sale where we go in from not having any presence in an organization to managing our entire IT infrastructure. What I expect and say is they’re going to come, they are going to buy one or two products maybe three to solve the problem that has their hair on fire right now.
And then as they see how great our products are they see how easy they are to use then they’re going to buy more of them. And the great thing about our product is how long it takes them to be deployed.
They deploy it they day typically they download them and install them and begin to evaluate them, most of time they are deployment and their production environment. So we don’t have that challenge that our many of our competitors have, the names that which you might know.
They like to do the big enterprise software sale where it take six months or a year for the technology to begin to be implemented. Nobody knows if they are really going to work within days if not hours our technology is deployed working showing value and it’s one of the great benefits that our model has.
Gregg Moskowitz – Cowen and Company, LLC
Right, thanks Kevin that’s very helpful. And then just a quick follow up for Jason, are there any changes to your forecasted licensed revenue growth of 12% to 18% for 2014 or your segment growth expectations that you provided last quarter across wealth management in the industry.
Jason Ream
So we’re not providing any update for this Gregg. At this time we providing year outlook obviously with our year didn’t change much.
And we look at the outperformance in Q1 and how we’re talking about the business that really driving the change that the only update we can give you at this time.
Gregg Moskowitz – Cowen and Company, LLC
Okay, thank you.
Kevin Thompson
Okay, thanks.
Operator
We move now to Keith Weiss with Morgan Stanley.
Keith Weiss – Morgan Stanley
Thank you guys for taking my question and nice quarter. I just want to dig into through the economies that as you guys said that’s kind of pointed out on the call, drove this sort of out performance in international markets versus perhaps a more tempered view on how US commercial growth there.
And then the really strong performance in systems in that versus perhaps more tempered performance in network management. Is there a correlation between those two dichotomies, is there a relationship of why we saw both of those this quarter.
Kevin Thompson
Yes, so I think when you look at our international performance I indicated that our network management new business sales around 23% across Europe, Asia and US Federal. So we saw very strong growth in network management internationally not a stronger growth in North America on the network management side.
And that’s why we walked into Q1 expecting stronger growth in international that we did in North America. We had kind a took a little bit of a cautious view to the North American market.
I don’t see anything right now that gives me any real concern on the North American side. I think we can grow faster than we did in the first quarter as I indicated it was within the range of our expectations but not at the high end and definitely they will exceed my expectations in the quarter.
So I think we can grow faster in North America, I think we will grow faster in North America as we go through the rest of the year also think network management will grow faster in North America than it did in the first quarter. So really across all product lines we had a kind a very strong growth quarter in international.
The right of systems management I think couple of things are going on. One, SAM is just a really great product in server application monitor.
They did better with every category without a great functionality to it like application and which I mentioned which is driving an increased level of demand and we are adding on new customers at a pretty fast clip. When you couple that with the fact we seeing a really research and interesting last two quarters in managing all of the virtual servers that are out there.
So while that seem like a nice to have and we had decent growth in that product line but over the last 6 to 9 months it really feels like companies have begun to realize they have to manage that environment more effectively not just to reduce the cost of all they physical and virtual servers that are out there, but also to make sure that their applications are performing at the level that they want them to perform. And so the level of demand there is really been growing quickly and so those are the two things that are driving the growth of that product line both in North America and outside North America.
I guess the last thing I would to say is like the North America is at least with our three core network management product we actually had a really good quarter in North America which is SolarWinds network performance monitor, which is largest and most important network management product. SolarWind, network traffic analyzer which attaches at a very high rate they sale of MPM and then SolarWinds network configuration monitor.
We see the real uptake in demand around managing the configuration of the networking environment. So in some of the smaller network management product where the performance was not at the level I’d love it to be at.
So we feel very good about what we got done in Q1 I think we can do better Q2, Q4.
Keith Weiss – Morgan Stanley
Got it. And if I can sneak one more in.
I guess success begets imitators and we definitely heard a lot of vendor coming to market with this and launch of best [inaudible] value line of expanders in their data architectures. And trying to emulate I would say that the SolarWinds model.
How do you seen any change in your competitive environment from smaller vendors perhaps little lot more like you versus – your competitors who absolutely didn’t.
Kevin Thompson
Yes, so on the competitive side, yes I would say in most of our business the answer is no. We’re really not seeing a real change in competitive environment.
I think there is some companies out there doing cool stuff. But right are now doing in areas where we really don’t compete.
So it is selling developers on the application management side with models that are similar to ours or where they believe their model are similar to ours or they’re selling to other IT buyers that are not buyers that we really are relevant today. I think in some cases we will likely be relevant to those buyers in the future.
So we may compete with some of those vendors. And really where we see a lot of competition is within our MSP business.
And there what I’d say is where kind of kicking butt and taking names at the moment. As we are been our competitors and on a very frequent basis, and in many cases replacing them in a lot of accounts.
So I feel good on that side of what’s going on in the competitive environment and we see this all the time because as you know we go look at lot of companies we’ve made a number of acquisitions over the years. And so many companies want to tell us to running our model.
And when we get inside, they might be 30%, 35% doing what we do, but lot of what we’ve created and what makes us unique and what make us successful when gives us competitive advantage is not easy to emulate it is not easy to see. So we’re not really in competitor side, I do like what’s companies are doing.
They’re not in our competitive set, but even with those companies in those markets. So I think we may have opportunities.
They’re doing maybe 30% or 40% what we do and we look at that and we still see a lot of opportunity.
Keith Weiss – Morgan Stanley
Excellent, thank you guys.
Kevin Thompson
Thanks Keith.
Operator
And we move now to Scott Zeller with Needham and Company.
Scott Zeller – Needham and Company
Hi, thank you. Wanted to ask Kevin about North America and how the rollout has gone or the effort has gone around increasing your spend on both demand generation hiring.
So when we think about the North America being in the range of expectations, how would you compare that to the investment you actually made in the last few months?
Kevin Thompson
Yeah so like I said the investments a little ahead of the performance at this point, but that’s what we expected. As I indicated a lot of the initiatives we have underway with both product as well as business – your business system and your point hiring people take a little bit in time to both get those things done in the day you bring in someone new who is great and has wonderful view of kind of how we can improve what we are doing it’s going to take we give him a few days at least may be a week and just getting longer and longer and if you ask him begin to have a positive impact.
So I feel good about where we are. I think we have brought a bunch of new people into the team and that are going to be really strong and have a nice view of how we can improve not just North America but improve globally and they are already beginning you to make decisions that I feel really good about.
So I’d say that’s kind of where we are from a North American point of view, Jason I think has something to add.
Jason Ream
And just to clear Scott I mean most of our step up in investments wasn’t particularly tied to geographies. When you look at products investments obviously that’s by nature worldwide.
The sales investment is I think we took a global step up in capacity during Q3 and Q4 last year but really wasn’t focused on one geography versus another. And then on marketing we are probably English language buyers but it isn’t North America since we are leveraging internet and trying to target.
Those English speakers and at least people who can way their way through in some cases translated in the content as well so we are going worldwide with that as well.
Kevin Thompson
And the other thing may be to mention, is some of the things we do are going to have a quicker impact than others. We talk about our installed base sales team that we put together and really begin to invest in the second half of 2013, up over 200% year-over-year.
So some of the thing we do are going to have very quick impact within that window, some of the things we are doing are going to have an impact that’s going to take nine months to 15 months really begin to materialize. But you’ll see a little bit of it every quarter, we’ve seen that on the demand side already where we’ve seen doing a better job of capturing a higher level of quality demand which is we really been focused on.
So we are definitely beginning to see the impact it will take a little bit longer to flow through to accelerated new business growth but we are seeing some of it. We’re seeing some of it in Europe, seeing a little bit of it in North America, seeing it in our MSTCL team.
So it’s not you kind of have to wait year or year and a half and then something great is going to happen, instead what we are seeing is good portfolio really strong performance in Q4 really strong performance in Q1 and all things we are doing we are having an impact on that performance.
Scott Zeller – Needham and Company
And just to ask a question about the [B&A Barneski] business. How should we think I mean there is a reported number, but how should we think about other metrics around that business?
I mean is there a metric you be willing to share around number of MSP’s added for instance that are partners or what else can we look at or deal size or what else can we look at for color on the performance of that business?
Kevin Thompson
Yeah it’s a little tougher than some subscription models because while we generally sign your annual agreement we generally bill monthly. So the deferred increase is not that large because we are billing them month at a time.
What I’ll tell you that retention rate is strong and not as quite as strong as our historical SolarWinds business which has been in the mid 90’s. But our overall retention in the MSP business is around kind of the high 80s to low 90s kind of quarter to quarter which is really good compared to anybody else in that market place so that the kind of metric I will share that we haven’t shared with you, really shared in the past.
From an average transaction size of point of view it’s smaller because of their subscription deal than our average license based transaction but you had been we only been selling fully subscriptions for about almost a year now. If there is a little one example to give you a feel about where those are going to land.
So may be as we get on we get this business a little more mature with us we’ll think about providing a little bit more insight but what I would say as if we are doing well they have consistently met or exceeded the expectations we had for them each quarter from a new business point of view. And the retention rates have been fairly increasing system in part of SolarWinds.
So I feel good that what our teams doing, our retention rates have been really good in terms of people. We’ve got a very strong leadership team up there they own their business and they’ve done a really great job keeping their team together and growing their business.
Operator
We move now to Greg McDowell with JMP Securities.
Gregory McDowell – JMP Securities
Great and thank you very much. Kevin I want to ask you about the federal business strong up 53% year-over-year.
And was that sort of broad based healthy spending across the federal sector? Or were there any sort of abnormally large deals or some in concentration from particular agencies within the federal government?
Kevin Thompson
Yes so no abnormally large deals, no real concentration, it was just a good consistent federal quarter. I think you federal team has worked very hard to expand the number of agencies that are using our technology.
They worked very hard to increase the usage of the technologies by customers we’ve had in the federal government for both the long time and those we’ve have for relatively short period of time and I think we are beginning to see the benefit of that. Would you just a little more consistency and federal will never be as consistent as commercial.
Because you got all the red tape in your bureaucracy of federal buying and that’s always going to make it a little bit more inconsistent no matter how well we executed the business. And I think we have done a nice job of expanding our footprint and that has allowed us to have better quarters.
You look of kind of four of the last five quarters we’ve had good quarters and the only quarter we had a bit of a struggle was Q3 of last year and so I think we are really have done a nice job of creating a good solid business there.
Gregory McDowell – JMP Securities
Great thanks and one quick follow-up as you talk about the product releases for the rest of 2014, it sounds like the product release cadence is really very high. And I was wondering sort of longer term if all these new products coming out should make us sort of rethink average transaction size and whether there is sort of mix shift for subscription will make average transaction size sort of a less relevant metric or sort of how you are going to guide it to sort of which directionally how we are going to see that evolves that average transaction size as the product release – increase of things?
Kevin Thompson
Yeah so if you look at the rest of 2014 you know product release cadence is a combination of brand new products and then just some really great releases of our existing products. So I don’t think you are going to see real impact over the course of rest of 2014 or average transaction size other than as Jason indicated potentially a little bit upwards as we move through the rest of the year.
So for the rest of this year I think what you had expected to move up off of the $7,700 we saw in the first quarter convertibly down a little bit in the first quarter and then grow through the rest of the year that’s been the install pattern. When you combine that with some of the things we are doing on product side which we think will increase the usage of our products by our customers in some cases, in other cases our new functionality that we’ll have price points that are kind of in a range of some of our more of our larger core products I think you expect to little drift up as we move over the course of this year.
We get a quarter just down a little bit I think we’ll average higher in the $700 for the full year of 2014. As it relates to kind of moving forward as we add additional subscription based offerings whether that’s on the MSP side of our business or whether that’s all on the sell directly to the IT pro start of our business I think we are going to have wait and see what those offerings are and what the price points are and then what we would likely do is try to give you a view of kind of our historical business as well as may be the new products that we are bringing on so that’s the other way to celebrate.
But that’s my kind of view right now that can change based on what those products look like. But I think we will try and give you enough visibility because we do try to do that so that you can triangulate on what’s going on.
Gregory McDowell – JMP Securities
Thank you.
Operator
And we move now to Tim Klasell with Northland Securities.
Unidentified Analyst
Yeah this is [Josh Bradley] in for Tim. So the license line was strong in this quarter, can you give any color on what products drove the upside in that line?
Kevin Thompson
Yeah so what we indicated was really strong on network management side in Europe Asia Pacific and federal that definitely was a big contributor. Very strong just performance by Europe across most all of our core products and that also drove that and on the federal side we had a strong quarter across many of our products.
And then as I indicated in my comments systems management continued to be a growth area for us with server and application monitor in virtualization manager having strong growth quarter. So that would be kind of way I’d frame what drove that.
Unidentified Analyst
Thank you.
Operator
And we move now to Daniel Ives with FBR Capital Markets.
James Moore – FBR Capital Markets & Co.
Yeah hey guys this is Jim Moore in for Dan. And just in terms of what you guys are looking at for M&A what kind of opportunities are out there?
If you are seeing anything interesting and then how you might think of balancing your investments in the business.
Kevin Thompson
Yeah so I think what you are seeing over the last 12 to 13 months is that we are investing aggressively in products that we are developing. We’ve made a couple of acquisitions both of which are very strategic to us.
And you know I think as we look forward there clearly are areas that we’ve indicated that are interesting to us so whether that’s system management, whether that’s cloud management, there is no capability we believe we have today that will allow us to sell in the market opportunities that exist right now. We talked about in response to the last three question about the opportunity we are beginning to see in SaaS based companies that are delivering technology and the services of our customers and provide and be more successful selling into those organizations I think as technology we can build and buy in that space.
And we’ll just have to see what we find. There is definitely application management and we talked about the ability to manage all things IT regardless of where the IT resource fits or where the manager resource needs to be located.
And I think there is some really cool technologies out there that we may want to add and some of those we will decide to build because I think we can build better technologies than the one we see out there and some of those we may decide to buy. So I guess long way to say I can’t guarantee we’re going to do acquisitions but we continue to look, but we’re also pretty aggressively investing in building product on our own because there is some things we believe we need to build and we can build them better than what we see available in the marketplace.
James Moore – FBR Capital Markets & Co.
Great thanks. Good luck going forward.
Kevin Thompson
Yes Stephanie we have time for one more question.
Operator
Thank you. We’ll go to Bob Owens with Pacific Crest Securities.
Robert Owens – Pacific Crest Securities
Thank you very much.
Kevin Thompson
Hey Bob how are you doing.
Robert Owens – Pacific Crest Securities
Good, could you comment on the core commercial license transaction that 4% year-over-year. I recall you’re up against the tough compare a year ago which you have added a lot more capacity.
But just to help us reconcile that number and what the expectations should be moving forward.
Kevin Thompson
No, I think if you remember back to Q1, Q2 of last year, one of the things we’ve done is we had built the team really focused on configuration management. And they did a tremendous volume of kind a $3,000 and $4,000 deal in Q2 of last year, which didn’t give us the total dollars we needed.
But if you remember gave really high overall core product transaction volume growth. And so we expect the core product transaction volume growth would be down on a percentage basis in the first quarter of this year because Q1 and Q2 of last year we had that team in place doing a just a bunch of volume but not at the average price that we needed.
So we are right kind of where we thought we would be in terms of the overall core product transaction volume growth. Because of the way I compared and look that growth rate should pick up and we move through the rest of this year because that begins to smooth out.
We still have a big of tough compare on the volume side in Q2 because that team was still in place for part of the second quarter. And then we took that team apart kind of middle of second quarter last year as those compares we’ll begin to drop a little bit.
So we really didn’t want to grow that aggressively but I’ll take it at the right average transaction size we are kind right of where we needed to be given the compare we were up again.
Robert Owens – Pacific Crest Securities
Total debt reached double digits than as we get to the back half of the year.
Kevin Thompson
No I think it clearly could and should, based on the guidance that Jason gave you on average transaction side, which is we think it will come up a little. But we’re not saying it going to come up a lot as we move through the rest of the year.
So the growth is going to have to be driven by higher growth in volume.
Robert Owens – Pacific Crest Securities
All right thanks guys.
Kevin Thompson
Thanks Rob. All right.
Thanks everyone who tuned in today. That concludes our first quarter earnings call.
Operator
This concludes our conference. Thank you for your participation.