Oct 28, 2014
Executives
David Hafner - Kevin B. Thompson - Chief Executive Officer, President and Director Jason Ream - Chief Financial Officer and Executive Vice President of Finance
Analysts
Steven M. Ashley - Robert W.
Baird & Co. Incorporated, Research Division Gregg S.
Moskowitz - Cowen and Company, LLC, Research Division Stewart Materne - Evercore Partners Inc., Research Division Robert Scott Zeller - Needham & Company, LLC, Research Division Tim Klasell - Northland Capital Markets, Research Division Greg McDowell - JMP Securities LLC, Research Division Karl Keirstead - Deutsche Bank AG, Research Division Daniel H. Ives - FBR Capital Markets & Co., Research Division
Operator
Good afternoon. Welcome to SolarWinds' Third Quarter 2014 Earnings Call.
Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Mr.
Dave Hafner, Director of IR. Please go ahead, sir.
David Hafner
Thank you, Matt. Good afternoon, everyone, and welcome to SolarWinds' Third 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'll 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, our growth opportunities and expectations regarding our growth and profitability, our market opportunities, our investment plans and our product releases 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. Precautionary 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 will now turn the call over to Kevin.
Kevin B. Thompson
Thanks, Dave. Thanks to everyone joining us for our third quarter earnings call.
We are planning to limit our remarks in this call to our results for the third quarter and our financial outlook, and we'll provide an update on our growth strategy at our Analyst Day in New York on November 12. We are pleased to report another very strong quarter growth with quarterly results once again exceeding our expectations for total revenue, core product new business sales growth, non-GAAP operating margin, operating cash flows and non-GAAP earnings per share.
Total revenue for the third quarter of 2014 reached a record $112.9 million, reflecting robust year-over-year growth of 28% and sequential growth of 11%. Our total revenue growth was comprised of recurring revenue growth of 31% and a license revenue growth of 24%.
In addition to strong revenue growth, our financial model showed great leverage in the third quarter, delivering non-GAAP operating margins at 45%, which was meaningfully in excess of our outlook for the quarter and raised our year-to-date non-GAAP operating margins to over 43%. Jason will cover our thoughts on fourth quarter investment levels and their impact on non-GAAP operating margins in his remarks.
We also had an incredibly strong quarter of cash flows, cash flows from operations reaching a record $54.3 million in the third quarter, which represents year-over-year growth of 29%. We believe our financial model remains unique in its ability to deliver high revenue growth, coupled with best-in-class non-GAAP operating margins and operating cash flows.
On several occasions, we have stated that we continue to see a large growth opportunity for SolarWinds in managing IT infrastructure that is deployed behind the company's firewall, where on-premise performance management solutions are required to meet the demands of IT Pros responsible for the performance of this infrastructure. In addition, we have stated that we believe many of our competitors have reduced their investment and focus on serving the on-premise market while we have increased our investment and focus.
We believe these investments are positively impacting the new business sales performance of our core network management and systems management products. In fact, over the first quarter -- 3 quarters of 2014, we have seen sequential acceleration in growth rates of both our core Netman and core Sysman products new license sales.
With the year-over-year growth rate in the third quarter, for core Netman new license sales reaching 21% and core Sysman delivering growth of 54%. We also had a very strong quarter of new business sales at our MSP group, which delivered total new business sales growth of 35% with subscription bookings, such as the new business growth driver for MSP group increasing by 78%.
On our second quarter earnings call, we discussed the launch of SolarWinds NPM 11.0, which included functionality we're referring to as Application-Aware NPM. As you remember, Application-Aware NPM allows an IT pro to answer 2 important questions: Is it a network or application issue?
And how do I map network performance to application performance and end-user experience? The launch of SolarWinds NPM 11.0 has been well accepted by our customer base, and we believe it was an important driver in the highest quarter of NPM and associated scalability engine new business sales growth we have seen in the last 12 quarters.
The acceleration in NPM growth driven by increased product downloads and higher conversion rates was the single most important factor in our core network management new license sales growth exceeding 20% in the third quarter, which is an important milestone for us. And even more impressive, is that this growth was driven by a 26% increase in core product transaction volume as we added new customers at a strong pace.
We also discussed our App Stack troubleshooting initiative on our second quarter call, which is aimed at helping IT pros answer a question they're struggling with, which is, why is my application running slow? And how do I fix it?
As you likely recall, we are not bringing your product to market [indiscernible] App Stack, rather, it is a combination of several of our products including NPM, SAM and Virtualization Manager, which together allow us to answer this question for IT pros. We believe this initiative has also been received positively, contributing to higher growth in product downloads and an acceleration in the growth rate of new license sales of SolarWinds Server & Application Monitor and SolarWinds Virtualization Manager, which were 2 of the major drivers of our high third quarter growth rate in core Sysman new license sales as well as contributing to the strong quarter of new license sales of NPM that I just mentioned.
Our product pipeline, which has been funded by the increased investment in our business that we kicked off in late 2013 continues to be strong. And as a result, we expect to have a number of impactful product releases come to market over the next several quarters.
As I've indicated on several prior occasions, our product investment and product releases are the fuel of which we feed our marketing engine. As we solve an expanding set of performance challenges for IT pros, our marketing team was able to create compelling content, optimize research, discussing the problems and challenges these new product releases address on our website and in other locations on the web that IT pros frequent.
This content allows us to drive an increasing volume of traffic to our website by capturing the attention of an increasing number of IT pros, who are on the web looking for information and solutions to the problems they face each day. The last topic I'll touch on is a brief update regarding the acquisition of Pingdom.
As a reminder, Pingdom is a cloud-based provider of website and web application monitoring and performance management solutions, which are offered as a service. The Pingdom business has performed well since the close of the acquisition in late June and met our expectation in terms of revenue contribution in its first full quarter as a part of SolarWind.
We continue to feel confident that a large and rapidly growing market opportunity exists to manage the performance and uptime of the website and web application. And that Pingdom is the right brand and technology platform for us to exploit, to capture this opportunity.
As a result, we plan to meaningfully increase the investment and the capabilities and size of the Pingdom product development, marketing and sales teams over the next several quarters to aggressively attack this opportunity. I will now turn the call over to Jason Ream, who will discuss our financial results for the third quarter with more detail.
He'll provide our outlook for the fourth quarter. And in a departure from past practice, he'll also provide some initial thoughts on how we believe our 2015 growth prospects are lining up in an attempt to remove some of the mystery and suspense between this earnings call and Analyst Day, and allow us to really focus our Analyst Day discussions on areas where we believe we are currently creating or plan to create long-term profitable growth.
I will now turn the call over to Jason.
Jason Ream
Thank you, Kevin, and good afternoon to everyone on the call. We are pleased to report another quarter of strong performance in Q3.
Record total revenue of $112.9 million was above the range of outlook that we provided on our last call, driven by strength in new business sales in the North America commercial, Latin America and U.S. federal markets.
Recurring revenue totaled $70.1 million in the quarter, increasing by 31% year-over-year and representing 62% of total revenue. The growth in recurring revenue was led by over 100% growth in subscription revenue with maintenance revenue contributing solid 23% year-over-year growth as our maintenance customer retention rates continue to be high and consistent with our historical trends.
License revenue increased by 24% year-over-year, our highest license growth in the last 7 quarters reaching a record $42.8 million in the third quarter. Profitability was higher than our expectations with non-GAAP operating margins at 45% for the quarter and non-GAAP earnings per share of $0.50.
The beat in operating margin and earnings per share was based on effective cost control by our operational leaders and the outperformance of the revenue line. Lastly, we ended the quarter with a solid cash position and the flexibility to access additional capital if needed preserving our ability to pursue opportunistically new ventures that we believe will accelerate our strategic roadmap.
Going a bit deeper into the quarter's performance, our new business sales grew substantially on both the year-over-year and sequential basis, leading to a record level of new business booked in a single quarter. You have heard us use the term new business sales before, but I'd like to take the time now to define that term since we have not done so in a few quarters and our business has continued to evolve during that time.
For our products sold under perpetual license, new business sales includes the license and the first year of maintenance. For our products sold under subscription, which could be either our MSP or our Pingdom businesses, new business sales includes the first year of subscription sold on an annual basis as well as the annualized value of subscriptions sold on a monthly basis.
With that said, for the third quarter, new business sales were up 29% from Q3 of last year and up 14% sequentially from Q2 of this year. Our sequential increase was led by sales in U.S.
federal at the end of the government's fiscal year, but new business sales into the North America commercial market and Latin America were up quarter-over-quarter ahead of what we typically see as a seasonal pattern. Relative to Q2, new business sales in Q3 for EMEA and APAC were within the range of our typical seasonal patterns.
We continue to be encouraged by the results and strong momentum that we have seen -- that we have been building within the North America commercial market. New business sales in the North America commercial market grew by 28% year-over-year and were up quarter-over-quarter as well.
We believe that these results were driven by both improved demand generation and continued improvement in execution by our North America sales team. Our sales leadership in North America has been with us for a long time, and we continue to invest in initiatives designed to improve our recruiting and screening processes, in-training for new and existing sales personnel and in systems and analytics that help us manage the team to drive the most outputs in the sales function.
New business sales in Latin America, our smallest geography but one where we believe there is a significant untapped opportunity, grew by well over 50% year-over-year and also reached a record for the quarter. It was contribution across the board from our network systems and MSP products.
And last but not least, our U.S. federal new business sales were up meaningfully from last year in what we believe to be a more normalized U.S.
federal spending environment. I want to point out a couple of highlights from this market.
First, on an absolute dollar basis, our new business sales in U.S. federal this quarter represented an all-time record for SolarWinds.
Second, we believe that this performance comes as a result of more focused investment in our U.S. federal sales team and more consistent investment and execution to specifically market to this customer audience as the increase was driven primarily by transaction volume growth in the quarter.
This volume-led results strengthens our belief and our ability to drive future growth in U.S. federal market.
In fact, for the 9 months ended September 30, our new business sales for the U.S. federal government have grown by 25% year-over-year.
From a product perspective, we saw a continued improvement in sales of our core perpetually licensed products. In the core network management portfolio, NPM sales and upgrades drove the bulk of our year-over-year growth, which was up from last quarter and was the best year-over-year growth rate we have seen for our core network management products in the commercial market since 2012.
In the systems management portfolio, we saw strong growth from SolarWinds Server & Application Monitor and SolarWinds Virtualization Manager, in addition to the contribution from SolarWinds Database Performance Analyzer, drive the best year-over-year growth rate we have seen in the commercial market this year. On a combined basis, new license sales for core network and systems management products in the commercial market grew by 26% year-over-year, a strong improvement in growth that we believe validates the investments we have made in this part of our business over the last 12 months.
Underlying with strong performance of our core network and systems management products this quarter was core commercial license transaction volume, year-over-year growth of 25%, an acceleration from the 17% volume growth we saw in Q2. The average size for core commercial license transactions during Q3 was $7,900, approximately flat on a year-over-year basis and down slightly versus Q2, but well within the range of our expectations.
Also driving our performance in Q3 was continued growth in sales into our existing customers by our installed base team, whose results grew by 125% year-over-year. Again, North America drove the majority of dollars of growth in this number, but the installed-base teams in both the EMEA and APAC regions also delivered strong Q3 results.
Our MSP business also had a good quarter, adding a record number of new customers during Q3 and growing new business sales by 35% year-over-year. In addition, MSP customer retention performed consistent with our expectations with renewal bookings growing significantly year-over-year.
Finally, Pingdom performed well during its first full quarter following the acquisition in June and recognized revenue came in slightly ahead of our expectations. We are excited about the opportunity we see to create explosive growth in monitoring of websites and web applications, leveraging the Pingdom brand, technology platform and team.
We plan to aggressively pursue this opportunity beginning this quarter. Moving from new business sales to revenue.
International contributed approximately 26% of our revenue in the third quarter versus 28% in Q2 with the decline driven by the positive impact of growth in new license sales of U.S. federal market during the quarter as well as the acceleration in North America commercial growth.
Looking ahead to Q4, we would expect for international to increase to its more recent level in the high 20% range. Total revenue from network management products was $66 million, up from $60 million in Q2 and $58 million in Q3 of last year.
Total revenue from our systems management products was $35 million, up from $32 million last quarter and $24 million a year ago. Our MSP and cloud revenue, which consists of our MSP products and Pingdom's website and web application management products increased to $12 million in Q3 from $9 million last quarter and $6 million in Q3 of last year.
Turning to expenses. Total non-GAAP expenses were approximately $62 million.
Once again, very close to the level we had targeted for the quarter. As we are just now moving into the fourth full quarter of our increased investment plan, the year-over-year growth and expense is still high at 41%.
However, the sequential growth over the second quarter was only 5% as our licensed business is driving increased leverage. We continue to be focused on aggressively investing in our business in order to capture the market opportunities that we see in the on-premise, cloud, hybrid and cloud provider world to manage the performance of technologies used in those businesses.
There are so many areas where we believe this continued investment will drive a positive return for the business, and we intend to continue to aggressively make those investments over the coming quarters but also intend to maintain our rigorous approach to spending with -- always with an eye towards the return on that investment. We generated record operating cash flow of $54.3 million in Q3.
And in August, repaid the $40 million we borrowed in late 2013 under our revolving credit facility. That facility remains outstanding through October of 2018 and our access to the $125 million of available credit under the base facility, as well as for the additional $75 million available under the accordion feature remains unchanged.
During the quarter, we repurchased approximately 54,000 shares for $2.1 million under the share repurchase program that we began during Q3 last year. This repurchase program expired on July 31 of this year.
In aggregate, we repurchased 1.1 million shares as part of the program for an aggregate purchase price of approximately $40 million. We ended this quarter with $215 million in cash equivalents and investments, with 61% held inside the U.S.
We believe that our cash balance and our outstanding credit facility provide us with a meaningful amount of capital to execute our stated strategy of managing all things IT. Turning to our outlook for the fourth quarter.
We currently expect to generate revenue in the range of $116.2 million to $118.5 million, representing 20% to 22% growth for the fourth quarter of 2013, which is an increase from the range that was implied for the fourth quarter when we provided the update to our full year outlook on our second quarter earnings call in late July. The increase in our outlook comes in spite of our current view of the euro-U.S.
dollar exchange rate, which negatively impacts the revenue we expect to recognize from international new business sales and from our deferred revenue balance. We are currently assuming an exchange rate of 1.235 for the euro as compared to the 1.36 that we experienced in Q4 of last year.
For reference, if the exchange rate in Q4 of this year was constant with the 1.36 that we experienced in the fourth quarter last year, our expectations for year-over-year revenue growth would be approximately 1 to 2 percentage points higher. The strengthening of our outlook for the fourth quarter is driven by the momentum we believe we have built over the last 4 quarters and our growing confidence in our ability to drive a sustained increase in quality demand for a network and systems management products in North America and EMEA in particular.
The combined strength in subscription revenue growth in our MSP business -- sorry, the continued strength in subscription revenue growth in our MSP business and an increase in our expectations for growth from Pingdom. We expect to generate non-GAAP operating margins in the range of 40.5% to 41.5% in the fourth quarter, continuing our plan to aggressively invest in the business.
Specifically, significantly increasing our investment in Pingdom, as Kevin indicated in his remarks, to capture the market opportunity that we see now and that we expect to be in a position to address over the coming quarters. For the fourth quarter, we expect our non-GAAP tax rate to be approximately 26% and to have approximately 77 million weighted average shares outstanding, driving non-GAAP earnings per share of $0.45 to $0.47.
Lastly, I would also like to provide some high-level thoughts on our expectations for 2015. We will go into much greater detail at our upcoming Analyst Day on the drivers of growth, our plans for investment and the roadmap that we are following as we look to increase our relevance to technology pros and company of all sizes.
But, so that our Analyst Day discussions can be focused on these more strategic topics rather than on waiting for the moment in the presentation when we provide our outlook for 2015, we want to frame our view of 2015 outlook for you today. Based on our current view of our business and the economic environment, we currently expect total revenue growth next year to be in the range of 20% to 25% over 2014, and for non-GAAP operating margins to be in the range of 40% to 41% as we invest in building out our IT management strategy for the cloud, which we'll discuss in a greater level of detail at our Analyst Day on November 12.
Just as I discussed with respect to our Q4 outlook, our current expectations for the euro-U.S. dollar exchange rate in 2015 are significantly lower than what we expect for 2014.
As we are projecting euro to be at a rate of 1.235 in 2015 compared to an average for 2014 of 1.33. On a constant-currency basis, our expectations for total revenue growth in 2015, as compared to 2014 would be approximately 1 to 1.5 percentage points higher.
We expect to have better visibility into 2015 as we get closer to the end of the year, and you should expect us to provide an update on our fourth quarter earnings call early next year. With that, I will turn it back to Kevin.
Kevin B. Thompson
Thanks, Jason. As you heard in our remarks, we had a very strong third quarter, building on what we believe was an impressive first half of 2014.
Our total revenue for the 9 months ended September 30, 2014, increased to $310.3 million or 30% growth over the first 9 months of 2013. At the same time, we outperformed on the non-GAAP operating margin line delivering year-to-date operating margins of 43% compared to an original forecast for the full year of 2014 at 40%.
Our model has shown great leverage over the first 3 quarters of 2014 creating 300 basis points of accretion in non-GAAP operating margin despite making an acquisition during that period, that was dilutive to operating margins. I think our financial performance over the last 9 months should put to rest the questions regarding our ability to increase non-GAAP operating margins when and if we decide to do so.
We also generated almost $148 million in operating cash flow over the 9 months ended September 30, 2014, which we feel puts us in position to be in the range of an impressive $200 million in operating cash flow for the full year. We believe the investment strategy we laid out in November 2013 at Analyst Day is starting to pay off.
As evidenced by our performance for the first 9 months of the year and specifically in the third quarter. In the third quarter, we saw accelerating growth in both our network management and systems management core product new license sales, as well as meaningful volume leaded strength in our North America commercial, U.S.
federal, Latin America and MSP businesses, which all exceeded our expectation. Our network management business delivered 21% year-over-year growth in core product new license sales, a meaningful acceleration in growth over the second quarter of 2014 and the third quarter of 2013.
We believe that we have created momentum in many areas of our business and we're prepared to finish 2014 and get ready to enter 2015. In the initial high-level view of 2015 growth, which Jason just provided, we currently expect to see continued acceleration in new business sales growth driven primarily by the investments we have made in products, marketing and sales over the last 12 months.
As our customer retention rates remain high across our business and are at our levels consistent with prior period, we expect recurring revenue growth to continue to be strong in 2015. We remain committed to our stated strategy of creating a product portfolio that allows us to manage all things IT, whether on-premise or in the cloud.
I believe that we have made a meaningful amount of progress towards this goal over the last 9 months, and we will make even more rapid progress between now and the end of 2015. We will discuss this progress and some additional detail around our plans for product expansion during 2015 at our Analyst Day.
We're looking forward to seeing all of you in our Analyst Day on Wednesday, November 12 in New York. We plan to share some additional insights into our 2015 products and market strategy, as well as a more detailed view in our 2015 outlook.
We'll definitely make it worth your time to attend. With that, I will open the call for questions.
Operator
[Operator Instructions] And at this time, we will take a question from Steve Ashley with Robert W. Baird.
Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division
I'd just like to drill down a little bit on the App-Aware APM product that was baked inside the recent upgrade release of net performance manager. Just trying to understand if that is something that's going to new customers.
Or if you were able to go back and cross sell of that into the installed base. Is it just a better attach rate upfront?
And just some more color around the uptake on that would be great.
Kevin B. Thompson
Yes. So the App-Aware NPM is as we talk about, really market-expanding technology for us.
And it's one that actually allows us to do both things you asked about. It allows us to go back into our installed base and sell our installed base more capacity for NPM.
So they're managing environment of x size, at where NPM allows us to go back in and sell them more -- the ability to manage a larger environment. So we can get new license sales by upgrade to a larger versions of the product or the more version of NPM inside of our installed base.
And we had a good amount of success at that during the quarter. In fact, our upgrades were very, very strong during the third quarter as our customers adopted NPM 11.0 and began to deploy that technology.
It also allows us to solve an expanded set of problems that we weren't able to address before. And so customers -- our potential customers that were out looking for a solution, they'll allow them to answer those questions about where the issues are?
Is it the application or is it the network? How do I fix the problem?
And that -- the ability to answer that question gives us the ability on the marketing side to talk about issues we couldn't talk about before. It makes us relevant to IT pros that we weren't relevant to before.
So it allows us to break in the new company that we weren't able to get into before. And we saw good success with that also.
So overall, when we talked about it, core Netman had very strong growth in the quarter at 21%, which is the highest we've been at in over 3 years. And NPM specifically led that growth during the quarter, really driven, we believe, by the release of NPM 11.0 and the new app aware technology that we've included within it.
Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division
Terrific. And then just new SKUs that are kind of pending in the pipeline.
Which ones are -- or maybe some where of those substantial products that will be coming out here in the near future.
Kevin B. Thompson
Yes. So we'll talk about some of the specific product releases that are coming out on November 12.
So I'm going to save really answering that question for that date. But we've got a lot of technology coming to market over the next 3, 6 and 9 months that we believe in some cases really improves products we have.
And in some cases, is new functionality that we don't have today. So we feel pretty excited about the technology we've got coming to market.
As I mention, really what that allows us to do is allows us to speak to a set of problems we couldn't speak to before. It allows us to be engaged in conversations with IT pros, where we really weren't relevant to that conversation before.
Which if we do all of that right, it will allow us to capture a lot more traffic and bring it to our website, where hopefully they find the product we want them to find and solves the problems they're out looking for a solution to, which allows us to continue to drive growth in the business.
Operator
At this time, we'll take a question from Gregg Moskowitz with Cowen & Company.
Gregg S. Moskowitz - Cowen and Company, LLC, Research Division
I just want to follow up on Steve's question, Kevin, on the App-Aware NPM. I realize it's early, but what are you hearing from customers?
And what do you expect going forward? Is it more function of them kicking the tires now doing a lot of testing?
Maybe rolling it out departmentally over a period of a few months? Or is it more along the lines of, we see the value, we plan to deploy across most or potentially even all of our network and server sense?
Just trying to get a feel for how you see that playing out.
Kevin B. Thompson
Yes, great. Good question.
So as you remember when I mentioned on the second quarter call, which is this is a technology that solve a set of problems that IT pros need to solve. But it's a relatively complicated set of issues we're trying to address, which is why the technology is important to them, as the way we deploy applications has changed, and so the applications are deployed.
You're on-prem and maybe some on-prem, some on the cloud, maybe it's hybrid cloud, maybe it's public cloud. It's created a whole new set of performance challenges for IT pros.
So it's going to take a little bit for these guys to deploy the technology, really understand how the technology helps them solve the set of problems that they're trying to solve. And then figure out how they want to deploy that technology.
Now we saw good initial success in the third quarter. We think we'll continue to see success as we move forward, and then it's going to build momentum as we move through Q4 and into 2015.
So I think the way you framed it is a pretty good one, which is they're beginning to use it in portions of their environment. They will begin to use it more and more, we believe, as they really understand the power that the technology has.
And how it allows them to do their job a lot more effectively than they've been able to do it before. And one of the things we've done is in order to make sure that they were able to deploy it very, very easily and quickly, you included as a part of the NPM 11.0.
And so when you buy NPM 11.0, you get App-Aware NPM as part of NPM 11.0. If you're upgrading the NPM 11.0 from NPM 10 dot whatever, and I can't remember what NPM 10 dot we are at.
And your a customer, then you going to get that functionality and then what it should do is to drive increase usage of your product -- the product which we already seen, which should drive you back if you're a customer to buy additional license capacity from us.
Gregg S. Moskowitz - Cowen and Company, LLC, Research Division
Okay, that's great. And then, Jason, just a quick one on maintenance revenue.
I'm not taking anything away from the strong license performance this quarter, and certainly the 2015 revenue guidance underscores the confidence in the business. But maintenance was in line to slightly below where consensus expectations had been.
And you mentioned that retention rates remain very strong. Was there anything else that might have affected that line item whether it would be discounting and/or currency?
Jason Ream
So, sure. There's 2 things to consider and you hit one of them there.
But the euro, obviously, has an impact. The way our -- we sell in a number of different currencies around the world, but for our international maintenance customers, that goes onto our books as euros and then comes off at whatever the exchange rate is.
So we did take some impact in Q3, not a big one, I don't think there's a bigger impact in our outlook cause we're taking what we believe to be a conservative view of what the exchange rate could be going forward. The second thing to consider, obviously, is although our new business sales momentum is in a good place and we've been pleased with the performance and the progress we've made, we're still obviously, on the maintenance side, running out the waterfall from the lower levels of new license sales growth that we had in early 2013, right.
So if you think about how maintenance revenue builds over time, we're still running out that portion of our history and need to build past that in order to move past that level of license growth. And so you'll see that in the maintenance line.
Kevin B. Thompson
The other thing I would say is that, maintenance actually came in a little bit ahead of our expectations. So I think maybe the modeling by investors and analysts, they're waterfall obviously is not as detailed as ours, that we actually did a little better on the maintenance line than we thought we would in the third quarter.
And our retention rates are as high as they've ever been. And we still believe there's an opportunity to make them better, but they've been consistent for a long time.
Operator
Stewart Materne with Evercore has the next question
Stewart Materne - Evercore Partners Inc., Research Division
I guess my question would be a lot of your comments, obviously, in the U.S. business accelerated really strongly for you.
And I think you mentioned that EMEA and Asia Pac came in, in line with what you're expecting. I guess is that the normal pattern you'd expect to see with a lot of new product rollouts, meaning, the U.S.
sort of takes it up first and then you see some acceleration perhaps in EMEA and Asia Pac? And can you just talk about how that sort of factors into your thought process on the fourth quarter and '15 if you want to go there?
Kevin B. Thompson
Yes. So definitely, I think you're right with the thought, which is when you look at our historical activity.
When we bring new products to market, whether those are new versions or existing products whether they're brand new products to solve brand-new problem. We're going to get traction in North America, the most quickly and the reason for that is relatively obvious which is the bulk of our business over the years has come from North America.
We've got north of 25% of our business today coming from out side the U.S., but we have many more customers in North America. And our customers are generally the first people to adopt new technology from SolarWinds.
They trust us and if we bring something to the market that's new, we tell them it works, they're going to buy it and try it because they've had great success doing that in the past. So we're generally going to see a pickup of all new technologies in North America much more quickly than outside of North America.
So that's definitely part of the phenomenon you saw in the third quarter. We would expect to see international begin to create momentum in the fourth quarter.
And definitely, as we look to 2015, I think that momentum will really begin to build.
Stewart Materne - Evercore Partners Inc., Research Division
Okay. And just second question for me would be sort of a follow-up to maybe Gregg's question on maintenance.
On maintenance, Jason, when we've now seen license actually accelerating, should that -- we're thinking about the '15, you might provide more guidance on us, I guess, at the Analyst Day. But we're thinking out to '15 now that licenses reaccelerating with the exception of sort of the impact from FX.
Is it possible for maintenance to actually start to reaccelerate as we get, say, the mid-part of next year or later in the next year as the waterfall kind of works the other way around?
Jason Ream
So, yes, Kirk, if we are able to continue our license growth rates at this rate that we're at now, obviously that we can see that. Those -- the maintenance growth rate come up.
But as you pointed out there, we'll talk more about it at Analyst Day in a more detailed way for what we're expecting for 2015.
Operator
At this time, we'll take a question from Scott Zeller with Needham & Company.
Robert Scott Zeller - Needham & Company, LLC, Research Division
I'll just follow up on that previous question, I'll try again. Is there any way you can give us a directional percentage number for mix of license versus recurring revenue for your initial '15 guidance?
Kevin B. Thompson
As Jason indicated and I said in my kind of, initial remarks, we're going to talk more in detail at Analyst Day. Really, the goal here was to give you an initial kind of high-level view, so you don't have to wait and wonder for another 2 weeks about what our guidance was going to look like for next year.
We'll talk about it in more detail and give you some thoughts about recurring revenue versus non-recurring revenue and new business sales growth, those types of metrics at Analyst Day.
Robert Scott Zeller - Needham & Company, LLC, Research Division
Okay. And then just for clarification on the Netman performance, we heard 21%.
Was that year-to-year license growth in Netman? And then we also heard a 26% number.
Can you just clarify which was which there?
Kevin B. Thompson
Yes, the 21% is year-over-year new license sales growth for our core network management product. 26% is year-over-year new license sales growth for our core network management product and our core systems management product combined.
Systems management by itself was at 54%. Very strong growth numbers, all an acceleration off for Q2, and Q2 was an acceleration off of Q1.
Operator
At this time, we'll take a question from Tim Klasell with Northland Securities.
Tim Klasell - Northland Capital Markets, Research Division
I wanted to dive a little bit into the federal side. And normally, that -- this is obviously a strong quarter.
And historically, we've actually seen the average transaction size maybe tick up or -- off of Q2. But this was a little bit lighter.
Was there anything going on? Or was it just a large volume of smaller deals that held that back?
Kevin B. Thompson
Yes. Look I think there's a good thing about U.S.
federal in the third quarter is that we had a record quarter ever in our history in the third quarter in federal. But at the same time, our transaction size is really did not move much and that really goes to the point we've been trying to drive, which is we want to drive a volume-led business in federal, federal business that is strong and is growing, but is led by volume, it is not dependent on a handful of large transactions.
And that's been the focus as you know for the last couple of years, I think what you saw in Q3 is a very, very strong federal quarter, but one that was been led by volume. And that's the kind of business we want to create.
And Tim, not that I won't take the big deals, if they come, we'll take them, we're not going to turn them away. We're not going to say, "Hey, don't send us a PO."
Well let them send it to us. But we really do want to have a volume led business in federal.
And I think the team there has done a really awesome job of beginning to create that and it's driven as you've seen, much more consistent results. We're 25% growth year-to-date in U.S.
federal so it hasn't just been a strong Q3. We've had a strong year in federal so far because we really have made that leap we believe to be a volume-led federal business, which is kind of the way our whole business has been created.
Tim Klasell - Northland Capital Markets, Research Division
Okay. Where there any transactions over 500K?
I think you used to give us that?
Kevin B. Thompson
Yes, we don't disclose it quite that way. But there weren't any individually significant transactions in the third quarter.
We do a bunch of transactions in that kind of 100k to 300k range in federal, but then we do also a bunch between 10K and 100k. And as you tell by the various transaction size, we just didn't have any really large transactions or our average transaction size would've kicked up.
Tim Klasell - Northland Capital Markets, Research Division
Okay. And then sounds like you're investing in Pingdom, obviously, a great product.
But where do you want to take it? Is it product development?
Is it sales and marketing? What are you going to be investing in that product?
Kevin B. Thompson
You know it's a combination of both. If you look at the technology today, it's really great.
And Pingdom has a great brand and a wonderful web presence. One of the stronger web presences in the web and they really haven't spent a lot of money to do that -- to create that.
They've just done kind of lot of the hard work over the years. But if you look at the pricing model you see on the Pingdom website, our deal size as an individual customer don't get very large unless you have a lot of websites.
There's a lot of functionality we can add to the Pingdom product to raise the amount of money that we can get from each individual customer over time. So if you want just the basic website monitoring and web app monitoring Pingdom does today, those prices will basically remain the same, but we're going to add features and functions that are at a higher level.
That will drive the amount of revenue that we can get from an individual customer on an annual basis up over time so that's part of it. Part of it is we need to do, spend a little bit more time and effort on marketing today, Pingdom almost doesn't market at all to their user base.
And they have well over 0.5 million users of their products and they don't talk to them very often. So we need to those users cause most of those are not paid and make sure they understand why they might want to move to a paid relationship with us and what the value is in there and we also just need to drive the awareness of that brand globally in a much faster pace than it's been driven before.
It is really great technology. We believe it's the best technology in the market.
We believe that that's absolutely the best brand in the market as it relates to WPM, and we just need to expand the relevance of the brand.
Operator
At this time, we'll move to Greg McDowell with JMP Securities.
Greg McDowell - JMP Securities LLC, Research Division
I have one question for Kevin and one question for Jason. Kevin, so the recent strong performance and sort of the confidence heading into 2015.
When you take a step back and say, how much of this is attributable to just a good IT spending environment or an IT spending environment improving for this particular category has offered versus just better execution internally at SolarWinds or operational improvements made. So do you attribute it to one or the other?
Or is it a little bit of both? I just love to hear your thoughts there.
Kevin B. Thompson
No, I think I attribute most of it to a whole lot of hard work over the last 5 quarters. I think we have -- we improved our execution across a number of areas.
We've improved our capability across a number of areas. We really taken the time to build a deep marketing team and implement systems that many of the those systems are on line now, which is also something we're working on, that have given us better visibility into our business, and they're giving us insights much more rapidly than we had them before and allowing us to make changes on the fly that are having a positive impact.
We've also worked very hard to expand the depth of our sales management team globally to make sure that we have enough capacity in cubes around the world, so that we can take advantage of the demand that we're capturing. And I think we've done a much better job of that over the last 4 or 5 quarters that we have in any other time in our history.
I think we've also rededicated ourselves to driving growth in our core network management business. And I think you're starting to see the impact of that with growth getting back over 20% for the first time in a long time and you've seen growth in our core systems management business accelerate.
And that's just a commitment on our part to really take advantage of our market opportunity we see this very large, it's continuing to grow, where we -- I think the others are beginning to not to focus on that opportunity as much as we can and as much as we will. And that's just something we got to stay really focused on.
Is the environment better? I don't know how much the environment is better for infrastructure software, the results have been, as you know other than ours a little bit mix on the infrastructure side other than the security players.
The security players have definitely putting up good numbers. The infrastructure guys have actually struggled a little bit other than us.
So I would say that we are, for the most part, out-executing our peers in the infrastructure pace -- stage right now, and we believe that we created momentum systems and built an organization as we look in 2015 that allow us to continue to execute at least at the levels we're executing today. And I'm not even close to satisfied yet in terms of the level of execution I think we can actually reach and the organization knows that.
They know that we can get better and we should get better every quarter as we move forward.
Greg McDowell - JMP Securities LLC, Research Division
And one quick follow-up for Jason. Jason, this year certainly, there's been a philosophy of deliberately letting any revenue upside flow straight to the bottom line.
And I was just wondering now that you sort of put up 2015 number out there, if philosophically, that idea or that goal of letting all revenue upside flow to the bottom line is going to change moving ahead?
Jason Ream
Yes, Greg, that's a great question. And no, it absolutely will not change.
And quite frankly, it's -- there's not a lot we can do about it, right? And when we outperform on the top line, it just does flow to the bottom cause we don't have a lot of incremental costs associated with that revenue.
So yes, that -- you should that expect that to change. When we outperform, no.
Our guidance will continue to put out guidance where we think are the appropriate level investment that we can spend and get return on that investment, we'll put that out in our outlook. But when we outperform against the revenue side of our outlook, you should expect that in the quarter to come to the bottom line.
Operator
We'll take a question from Keith Weiss with Morgan Stanley.
Unknown Analyst
This is Sandra Singh [ph] for Keith Weiss. I have a quick question on the cross-selling, upselling efficiency this quarter.
It seems like the inside sales team had another strong quarter. So I was wondering if you'd assess for us the cross-selling upsell of productivity this quarter.
And then as it relates to 2015 guidance, how much improvement are you baking in, in terms of cross-sell, upsell of -- for next year?
Kevin B. Thompson
Yes. So our install-based sales team, as Jason indicated in his remarks, grew at 125% year-over-year, which continues a string a quarter with over 100% growth.
So that team has done very well. And they really -- we really have, I think, found an equation and a formula, it works to sell back into our customer ways more effectively than we have in any point in our history.
Today, our install-based sales team is based at the same productivity level as the rest of our sales organization. So an individual rep basis, we're not really looking at individual reps getting more productive on the installed-base sales team.
And if you're from my guys that are listening, I'm happy to have you be productive. And that's not a limiting factor for you.
But in our modeling, we're not assuming that the average across that team gets higher. But we absolutely believe we can continue to grow our sales into our installed base at a very good clip as we move in the next years.
So that will mean is we'll continue to add reps to that team on a global basis as we continue to have success and as productivity on an average per rep level continues to be at or close to the level we get across the rest of the floor.
Unknown Analyst
Great. And then on the international side, I was wondering if you have any commentary as it relates to maybe some of your larger markets in Europe and Japan?
And as well as maybe you can discuss the improvement that you saw on Latin America this quarter. Is that just a rebound from some weakness earlier this year?
Or do you see that the improvement we saw this quarter as more sustainable?
Kevin B. Thompson
Yes. So we'll start with that question since the last is easier for me to remember, so I think Latin America improvement was due to a much better job of executing against a pretty high level of demand.
And I do think that's sustainable. I think we continue to put up very strong growth numbers as we move forward in Latin America.
I think we've got a really good team now. And it's taken us a while to build one.
And we've got good leadership. And on the marketing side, we're doing a better job of focusing on the geography.
So I feel good about what we got in place in Latin America. As Jason indicated, it's a small part of our business today is our smallest geography, but there's definitely opportunity there.
And I do think we are -- we're finally going to crack the code a little bit and then once they we're completely done. But we've at least began to crack the code on how to drive growth in that marketplace.
So I do think that, that will continue to be a growth area for us. As it relates to, I think, Japan, you mentioned.
Japan, we're still very early in Japan but we are putting up good growth numbers, but often numbers that are so tiny that they don't move a needle at all. But we are having success there, and it is an area of focus for us to continue to drive success.
It's a big market, we think we can continue so we can drive growth there for a long time to come, but those numbers are really very small. So even though the percentage growth numbers are pretty good, the absolute dollars are very, very small.
As it relates to Europe and Asia, absolutely believe those will be growth markets for us in 2015, that they should be strong growth margins in 2015. And in Q4, as Jason indicated, we think they'll be a greater percentage of our overall total bookings than they were in Q3.
Operator
This time we'll take a question from Karl Keirstead with Deutsche Bank.
Karl Keirstead - Deutsche Bank AG, Research Division
I've got a strategy question for Kevin and a guidance question for Jason. So Kevin, in your prepared comments, you were explaining the very good performance on the NPM license side.
And you mentioned that it might be due in part to the fact that you put a lot of focus on the on-prem deployment solution. But in the margin guide for 2015, I think one of the explanations was that you're investing aggressively in IT management in the cloud.
So I just wanted to ask you the on-prem cloud priority question. And then for Jason, the NPM performance on total revenue growth looks like it was about 14%.
So you're now tracking to the high end of your Netman total revenue guidance, which is terrific. For next year, do you think you could see an acceleration in the total Netman revenue growth?
Is that baked into your 20%, 25% revenue growth assumption?
Kevin B. Thompson
Okay. So on the strategy question, what I would say is that we are absolutely balancing our investment in on-prem versus cloud.
We absolutely believe and we'll talk about this more on Analyst Day, that you have to be able to manage all things IT regardless of where they sit. So if they're on-prem you've got to manage them.
If they're in the cloud, you've got to manage them and you have to be able to create a connection for an IT pro between the cloud and what sits on premise. So you're not going to see us reduce our level of investment on -- in the on-premise world.
We think there's a big market opportunity there. We're showing momentum, and we think we can continue to take market share and that market is actually continuing to grow.
But at the same time, you will see us, just like you've seen us over the course of this year, begin to invest in technologies that are relevant today to managing IT performance. So that those IT assets that needs to be managed are in the cloud, some of those IT assets that need to be managed are on-prem.
So we'll talk about that on a lot more detail and how we see those markets evolving and how we plan to attack the different pieces of those markets because actually I don't think they're very well understood as it relates to management and what you need to do to be able to manage those environments. So we'll share a number of comments around that at our Analyst Day, so I hope you'll be there and we can answer your question a lot more detail.
Karl Keirstead - Deutsche Bank AG, Research Division
And Jason?
Jason Ream
So Karl, I think actually that we might be slightly ahead of our -- the range that we put out at Analyst Day last year. But to your question, look, our intent for sure is to continue to invest in network management market and to continue to accelerate our momentum and our growth rates for both new business sales, as well as for total revenue.
Based in our outlook, it's not out. You will talk about that at Analyst Day, but it's nothing baked in demands an acceleration from where we are now.
David Hafner
Matt, we have time for one more question.
Operator
That question will be from Daniel Ives with FBR Capital Markets.
Daniel H. Ives - FBR Capital Markets & Co., Research Division
Just more of a high level question going 2015. I'm sure you'll talk more about it on Analyst Day, but what do you think the biggest opportunity as well as on the other side, challenges for you guys heading into 2015, given some of the success that you had, as well as you expand the product footprint and geographics?
Kevin B. Thompson
Yes, surely, Daniel. We'll talk about the opportunities we see in front of us a lot on November 12, so I'm going to save the answer to that question for November 12 when we can do it justice and really talk about it as a level of detail and in a form that gives us a time to really address that.
As it relates to your challenges, look, I think we just got to continue to stay focused as an organization. We've got to make sure that we build on the momentum we created, that we don't allow any of that momentum to slow down, that we don't take anything for granted, that we realize that we've improved the performance of our business through a lot of hard work over the last 15 months by the whole organization on a global basis.
And in order to continue to drive the kind of growth I believe we can drive and I want us to drive, we just got to continue to do that. So I don't view it as anything outside our control.
We've got -- there's currency exchange rate and those kind of things we can not control and I'm not worried about those. We will drive growth through all of that in terms of just a raw amount of business -- new business we're actually bringing in.
But it really is all about execution and those are the things that we generally have under our control. But we'll talk a lot more about growth strategy here in a couple of weeks.
And with that, thanks, everyone, for joining us on the call. Hopefully, we'll see all of you in New York, because we do have a lot of the things we want to share with you.
So I think you'll find it kind of well worth your time to attend, and we'll try to make it your enjoyable day. Thank you.
Operator
Again, that does conclude today's conference call. Thank you for your participation.