Nov 14, 2018
Executives
Dave Hafner - Head of Investor Relations Kevin Thompson - President and CEO Bart Kalsu - Executive Vice President and CFO
Analysts
Heather Bellini - Goldman Sachs Sterling Auty - JPMorgan Brad Zelnick - Credit Suisse John DiFucci - Jefferies Matt Williams - Evercore ISI Walter Pritchard - Citi Sanjit Singh - Morgan Stanley Kash Rangan - Bank of America Terry Tillman - SunTrust Matt Hedberg - RBC Capitals
Operator
Good afternoon. My name is Mike, and I will be your conference operator today.
At this time, I would like to welcome everyone to the SolarWinds Third Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers remarks there’ll be a question and answer session [Operator instructions]. I will now turn the call over to Dave Hafner, Head of Investor Relations.
You may begin your conference.
Dave Hafner
Thank you, Mike. Good afternoon everyone.
And welcome to SolarWinds third quarter 2013 earnings call. With me today are Kevin Thompson, our President and CEO and Bart Kalsu, our Executive Vice President and CFO.
Following prepared remarks from Kevin and Bart, we'll have a brief question-and-answer session. Please note that this call is being simultaneously webcast on our Investor Relations Web site at investors.
Solarwinds.com. Please remember that certain statements made during this call, including those concerning our financial outlooks, our expectations regarding growth and profitability, our market opportunities and market share, areas of focus for our business and our product plans and releases, are forward looking statements.
These statements are subject to a number of risks uncertainties and assumptions described in our SEC filings, including the risk factors discussed in our final prospectus dated October 18, 2018 and filed with the SEC on October 22, 2018, pursuant to the rule 424B of the Securities Act of 1933 as amended in the Form 10-Q that we anticipate filing on or before December 3, 2018. Should any of these risks or uncertainty 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 an non-GAAP basis. This includes references to non-GAAP revenue.
When discussing revenue on today's call, we will be referring exclusively to non-GAAP revenue. Our use of non-GAAP revenue reflects our adjustments to GAAP revenue for the purchase accounting related impacts to revenue falling or Take-Private transaction in February 2016.
Our use in calculation of these non-GAAP financial measures are further explained in today's press release. And a full reconciliation between each non-GAAP measure and its corresponding basis points measure is provided the tables accompanying the press release.
However, each non-GAAP item in our forward looking financial outlook that we will provide today has not been reconciled to the comparable GAAP outlook item, because providing projections of changes in individual balance sheet and income statement amounts is not helpful about on a reasonable effort. And release of such reconciliations would imply an inappropriate degree of precision.
Unless otherwise indicated, references to profitability and comparable measures refer to such measures on a non-GAAP basis. With that, I'll now turn the call over to Kevin.
Kevin Thompson
Thanks Dave, and thanks to everyone joining us for our first earnings call as our return to the public market following our IPO in October 19, 2018. We are pleased to announce a great start to our second journey as a public company.
Our results for the third quarter exceeded our preliminary results and our final prospectus as we delivered $214 million in total non-GAAP revenue and adjusted EBITDA of over $106 million, which reflects 49.8% adjusted EBITDA margin for the third quarter. We saw solid grounds across each of our revenue streams in the third quarter with our non-GAAP license and maintenance revenues growing at 8%, driven my license growth at 8%, which is a solid quarterly license revenue we have seen since our Take-Private in 2016.
Our non-GAAP subscription revenue increased by 22%, and total non-GAAP revenue grew by 12%. Our third quarter results illustrate the continued momentum we have seen in each of the first three quarters of 2018 in our license and maintenance product line as we have accelerated the rate at which we are taking share in the on-premise IT management market.
This has resulted from our ongoing investments in this product portfolio and the extension of the capabilities of our on-premise products to manage public cloud IP infrastructure and applications. Our subscription revenue comprised of revenues from the sales of our MSP products and our cloud management products.
In the third quarter we saw product ramp from both of these product lines, driven by strong capital growth in MSP and by the breadth of the capabilities we have rapidly developed in providing cloud-to-cloud management solutions. While we remain true to the [indiscernible] of the SolarWinds model, which has allowed us to build a fast growing and highly profitable business.
We took advantage of the opportunity we had as a private company over the last 2.5 years to rapidly and meaningfully improve our business. We think our solid third quarter results did a great job of illustrating this progress we have made, significantly expanding our market opportunity, by extending the silent zone more deeply into the MSP market and through driving a portfolio of leading products to have technology products and is cloud based in hybrid IT infrastructure and application environment.
We also continue to invest in our on-premise network and systems management business, allowing us to gain additional market share. We moved into the number one position in network management in 2017 and extended our lead in 2018.
We have the same the number four position in systems management, moved into the leading position in remote monitoring and management market for MSPs. In addition, we’ve created a strong presence in the public cloud management.
We manage to do all of this while meaningfully increasing our level of non-GAAP profitability as measured by our adjusted EBITDA margin, which is at 48.1% for the first nine months of 2018. We have three big goals we were excited in early 2018.
First, we wanted to position the Company in our technology portfolio to take advantage of the hybrid IT infrastructure world we anticipated becoming. We believe back in 2016 and continue to believe today that organizations will deploy IT infrastructure in different locations, and growing on-premise in the private cloud and both the data centers and in the public cloud.
Taking into account, constantly stabbing for three variables, cost, performance and security as they make these decisions. Over the last three years, we have created the broadest and deepest set of hybrid IP infrastructure management products in the market to provide technology players the capabilities they need to manage their IT infrastructure whether their infrastructure is deployed on-premise in the public cloud in both the data centers and the public cloud or at all of these locations, which is what is most likely in today’s IT environment.
In addition, we now provide technology plans with the advantage to choose what location these environments are best managed from. We’ve extended the capabilities of our key network and systems management on-premise product to manage competitive cloud, providing our customers with a similar view of their hybrid IT environments across all public cloud providers.
In addition, we have developed a comprehensive set of cloud based products to developers, dev ops player and IT ops player can use to manage their native cloud infrastructure and application, which they have leverage to rapidly build what we expect to be $50 million ARRS subscription revenue stream in public cloud management by the end of 2018. Second, based on feedback from nearly 150,000 registered members of our user communities, is that our belief for many years for the rapid pace of change in technology would drive small businesses all around the world to look for knowhow to managing the performance of their IT infrastructures.
We now believe that these small businesses return to manage service providers an ever increasing numbers to handle these issues for them. We met our initial investment in the MSP market through the acquisition of N-able in 2013.
At that time, only approximately 17% of small businesses were using MSP to manage their IT environment for them. Fast forward to today, we had 45% of SMBs are using an MSP to manage all or part of their IT infrastructure.
We double down on our investment in the MSP market only a few months after the Take-Private through the acquisition of LOGICnow in May 2016, which gave us a fully cloud-based log sales product to attack the rapidly growing SMB market through the MSP channel. We have now created the highest possible and fast line subscription revenue stream in the MSP market, which we expect to be an over $225 million ARR revenue stream by the end of 2018 at the point of the guidance that Bart will provide in his comments.
Third, one of the unique and powerful financial model in 2016, however, we believe we can make our financial model more powerful and more predictable. Over the last three years, we've increased our subscription revenue from less than $60 million of ARR to over $270 million of ARR as of the end of the third quarter 2018.
We've done this by adding new subscription based cloud and hybrid IT management products, and by increasing our investment in the MSP market. It is important to note that we have not transitioned any of our historical license and maintenance products to a subscription model.
The rapid growth in our subscription revenue stream has been driven by new products and new customers. Our license and maintenance customers continue to look to buy our on-premise product, leveraging our access to the capital budget.
Today, over 80% of our total revenue is reoccurring and we expect that percentage to continue to grow and installed with our subscription based product for the fastest growing portion of our business. In fact, in the nine month in the September 30, 2018, non-GAAP subscription revenue represented almost one third of total non-GAAP revenue.
SolarWinds' high profitability on a non-GAAP basis is part of the SolarWinds' DNA, and our reported results illustrate the operating leverage and efficiencies our business runs on. In fact, today, we have been most profitable than we were when our Take-Private was announced in the fall of 2015.
The nine months ended September 30, 2018, adjusted EBITDA margins were 48.1% and non-GAAP operating margins were 46%. We have increased our adjusted EBITDA margins by over 3 percentage points in the last three years, all the while investing in new products and new market, which we believe has more than doubled our total addressable market opportunity over the same period of time we have done a large SaaS based subscription revenue stream.
So with that view U.S. as a public company before the 2016 Take-Private, you'll recall we often talked about SolarWinds' model.
In hindsight we think that the SolarWinds' model was generally not fully appreciated and was viewed by some as being overlay software model that employed digital marketing and inside sales team for some restaurants, IT management products and small businesses. Our view is SolarWinds is definitely not the complete one.
In a totality, the SolarWinds' model is an interconnected system that [indiscernible] with our product. We've got great products [indiscernible] and the secret sauce and recipe for our model for our success and for the management leadership positions we've achieved.
Our products are designed with the needs of the technology [indiscernible] to use our products every day in mind. Our products are [indiscernible] solve the problems faced by technology players, [indiscernible] problem to be solved.
Our products are designed to be the best solution in the market and addressing the IT management challenges faced by today's technology professionals. In addition, we are not and never have been a company focused on only serving the SMB market.
We have created a technological portfolio and a go to market mission that has allowed us to serve the entire market and very small companies that have IT infrastructures that are important enough that need to be managed to the largest companies in the world. In fact, 499 of the Fortune 500 are currently customers of ours and more of them have become sizable customers.
As a [indiscernible] that not only are we able to effectively fill small businesses but that we also have created large relationships with very large companies over the trailing 12 months ended September 30, 2018, we had over 695 companies and $100,000 or more with us. We had a [beneficial long] and expand model, which generally expands with the small commercial relationship of less than $10,000 that the customers finds, tries and buys one of our products that allow them to solve an urgent problem that has their head on fire.
Then as they detect the success with our products, they become our [indiscernible] advocate inside the customer, driving expanded use of our products. This [indiscernible] long and expanding approach has resulted in and continue to result in the development of a meaningful number of very large customer relationships.
What's [indiscernible] about the other key principles of our business, affordable and disruptive pipeline; our deep connection to our user community; products that simply meet the need of technology players and organizations of all sizes; the efficient go-to-market motion based on digital marketing small to medium size, which allows us to reach the entire market; the momentum we have in the market and the strength of our global team; we believe we have a solid foundation upon which to deliver sustainable long term growth at a very high level of profit and cash flow generation. While we have continued to make meaningful investments in our existing products, we also are rapidly bringing new products to market that solve today's evolving IT management challenges in a way that our users want them solved.
This year, we've released a number of exciting new products that extend our capabilities across our on-premise IT infrastructure, public cloud management and MSP product lines that I will talk about briefly before turning it over to Bart who will walk you through the details of our financial results. While the machine guide has a rich source of information technology professionals harness to allow them to identify and understand and address performance challenges in IT environments and applications.
Unfortunately, the high quality and complexity of existing enterprise log management solutions offer these products out of reach for many companies both big and small. We believe our early Q3 release changes that.
With an easy to use product that is designed but it does not require professional services to implement and an easy to understand pricing model with a disruptive entry price point of $1,495, Log Manager makes full enterprise platform management accessible to companies of all sizes, allowing users to aggregate, search and chart log data. Log Manager also sits on our Orion platform, the foundation for many of our flagship products, including network component monitor, server and application monitor and database performance analyzer, giving our users the unified view of network and systems performance.
Like any good IT service value and our customers are great IT professional leverages one way to determine what's going on within a system. When something goes wrong, users' first question is what changed in my environment.
SolarWinds Server Configuration Monitor, which was released at the end of the third quarter, answers that key question by allowing IT products to quickly gear in on system and application changes, identify when they occurred, where they occurred and trace those changes back to performance issues. Solar Configuration Monitor also allows IT ops team to rapidly monitor and receive alerts on system changes and call back changes to performance overtime.
SCM is also built on the Orion platform as we continue to make it easy for IT players to implement and use multiple products in SolarWinds that are fully integrated out of the box. Like all our products, SCM is designed to be affordable starting at only $1, 750.
Also in the third quarter, our MSC business launched the latest version of SolarWinds N-Central with a wide range of features, including deeper PSA application integration, enhanced patch management and NetPath. NetPath is a great example of how we're building our product to allow them to utilize across each of our product lines.
NetPath was originally developed as an important feature in one of our key network management products, SolarWinds Network Performance Monitor, and is now an integrated offering on our MSP platform. NetPath is designed to help users troubleshoot network performance issues by providing deeper visibility into network path, application response time and non-performance for on-premises, hybrid and cloud environment.
MSP can pinpoint slow down, outages and other problems through a visual depiction of every hot traffic case from the end user through the network to the applications being accessed in back. When the problem is found NetPath presents relevant network statistics and contact information for the effective node, giving businesses the opportunity to quickly alert other providers to get the service restored quickly.
Last, we very recently launched SolarWinds Application Performance Monitor, which extends the application monitoring capabilities and SolarWinds' sovereign application monitor, our flagship deployed on-premise Systems Management product. Based on the capabilities of app optics our cloud based application management product, Application Performance Monitor provides deeper visibility into the heath and performance of customer applications, both on-premise and in the private and public cloud using distributed tracing.
With developed SolarWinds APM in response to the findings of the survey of span users completed earlier this year. This survey review has 90% of the respondent, had at least one custom application in their environment and one of the capability, such as transaction tracing to thus improve their ability to successfully monitor those applications.
Respondents highlighted another key aspect that their number one priority will be able to use and utilize the solution to integrate it well with SolarWinds SAM. As you can see, our product organization has been very busy this year as we've developed and released a record number of new products.
We believe we currently have the most comprehensive product portfolio and IT management, and a user centric product strategy that gives tremendous competitive advantage in the market. Looking forward, we try to bring additional new products to market while enhancing our existing products, provide us with the ability to drive and sustained long term growth.
With that I'll turn the call over to Bart, who’ll walk you through the details behind our third quarter financial results, as well as our outlook for the fourth quarter and a preview of 2019. I’ll then wrap up with additional thoughts before we take your questions.
Bart Kalsu
Thanks Kevin and thanks again to everyone for joining us on today's call. Our third quarter financial results reflect strong execution in all areas of our business, while demonstrating the leverage that we have in our model.
Total non-GAAP revenue for the third quarter was $214 million, reflecting year over year growth of 12%. Total non-GAAP revenue for the nine months ended September 30, 2018 was $615.2 million, which is 14% increase over the prior year amount of $541.2 million.
We also had a very strong quarter of non-GAAP profitability and cash flow generation. Third quarter adjusted EBITDA was $106.5 million, representing an adjusted EBITDA margin of 49.8%.
And for the nine months ended September 30, 2018, adjusted EBITDA was two $295.7 million, representing an adjusted EBITDA margin of 48.1%. Cash flow from operations was $166.1 million, which was a 22% increase over the prior year amount.
In addition, we continued to convert a high percentage of our adjusted EBITDA into cash flow. Third quarter unlevered free cash flow was $86.5 million, which contributed to unlevered free cash flow of $259.7 million for the nine months ended September 30, 2018, which was up 18% year over year and represents 88% of adjusted EBITDA.
Our revenue model continues to show a high level of predictability with a high percentage of recurring revenue that gives us greater visibility into future period. Leading into our revenue results, non-GAAP license and maintenance revenue increased 8% year-over-year to $146.1 million for the nine months ended September 30, 2018.
That growth was driven by a combination of growth in license sales across our license space on-premise IT management products and strong results from the key regions in which we operate, coupled with strong renewal rates. Our high maintenance renewal rates highlight the value of our products, and the loyalty of our large on-premise customer base.
Our maintenance revenue growth also highlights the power of our unique products and maintenance pricing model, whereby we recognize approximately 40% of the initial license value as maintenance revenue in the first year. Overall, we are pleased with the performance of our on-premise IT management business in 2018.
We saw good momentum in our international and North America region, and non-GAAP license revenue increased 8% year-over-year in the third quarter to $43.7 million. Non-GAAP license revenue has increased 5% during the first three quarters of 2018 compared to the same period in 2017.
We believe that a large driver of the improvement we have seen in license revenue performance during the first nine months of 2018 is primarily the result of having a tenured sales and marketing leadership team that have established a higher level of focus on attacking the opportunity inside our customer base. Continuing with the overview of our third quarter revenue results, we also saw strong non-GAAP subscription revenue growth in the third quarter.
Non-GAAP subscription revenue of $67.9 million in the third quarter represented growth at 22% year-over-year. Within both our MSP and cloud management product lines, we continue to do a solid job of landing new customers, while retaining existing customers and expanding their spin on our products.
Our success at landing, expanding and retaining customers has translated into sequential increases in monthly recurring revenue and in addition, our subscription net retention is averaging 105% for the last 12 months. Looking ahead, our focus will continue to be on adding new managed service providers, DevOps and IT professionals to our customer base and driving higher growth by introducing new products in both the MSP and cloud management market with the focus on improving our net retention rates.
As we discussed, we now have a very high percentage of recurring revenue compared to where our business stood at the time of our Take-Private transaction. When combining prescription and maintenance revenue, our total non-GAAP recurring revenue in the third quarter of 2018 grew 13.1% year-over-year, and represented approximately 80% of total non-GAAP revenue.
While total non-GAAP recurring revenue represented 81% at total non-GAAP revenue for the first nine months ended September 30, 2018. Non-GAAP expenses were $112 million in the third quarter of 2018, which includes $94 million in non-GAAP operating expenses and approximately $18 million of non-GAAP cost of revenue expenses.
For the nine months ended September 30, 2018, total non-GAAP expenses were up 14% year-over-year, which is in line with total revenue growth, including an increase in general and administrative expenses as we prepare to once again be a public company, and the investments we made to support the long-term growth in all areas of our business. Looking forward, we expect to continue to seek to optimize our business to deliver best in class margins.
We see the opportunity for greater operating leverage in many areas of our business, including our product development organization, where we have made significant investments in recent years to expand and build upon or hybrid IT management capabilities. Before walking you through our outlook for the fourth quarter and the full year, I want to briefly hit on our capital position following our IPO in October.
As we disclosed in our final prospectus, we talked about during the road-show, we use a portion of the $353 million of net proceeds from the Initial Public Offering to pay-off our second lien debt of $315 million, which means we now have less than $2 billion in first lien debt outstanding and the rate is currently LIBOR plus 275. We will continue to monitor movements in interest rates and take advantage of refinancing opportunities if advisable.
Our net leverage ratio given effects for the pay-off of the second lien is at 4.2 times our trailing 12 months adjusted EBITDA and we expect that ratio will continue to decline through continued growth in our adjusted EBITDA and cash flow in the fourth quarter. And therefore, we expect to be closer to 4 times by the end of the year.
I will now walk you through our outlook before turning it over to Kevin for some final thoughts. Based on our strong performance this year through the third quarter, we are providing the following guidance related to our fourth quarter and for the full year as follows.
I'll start with fourth quarter guidance. For the fourth quarter, we expect total non-GAAP revenue to be in the range of $218 million to $220 million, representing year-over-year growth of 9% to 10%.
Our expected growth rate would be approximately 1% higher on a constant currency basis. Total non-GAAP license and maintenance revenue is expected to be in the range of $149 million to $150.5 million, representing year-over-year growth of 5.6% to 6.6%.
Non-GAAP subscription revenue is expected to be $69 million to $69.5 million, representing growth of 17.7% to 18.5%. Adjusted EBITDA is expected to be $107.8 million to $108.9 million, representing an adjusted EBITDA margin of 49.4% to 49.5%.
Non-GAAP fully diluted earnings per share is expected to be between $0.17 and $0.18 per share assuming an estimated $320.5 million pro forma fully diluted shares outstanding for the full quarter. Our guidance for the fourth quarter assumes a non-GAAP tax rate of 21%, but we only expect to pay approximately $3 million in cash taxes during the fourth quarter.
And lastly, our fourth quarter guidance assumes a euro to dollar exchange rate of 1.14. Our guidance as it relates to the full year is as follows.
We expect total non-GAAP revenue to be in the range of $833.2 million to $835.2 million, representing growth of 12.4% to 12.7%. Total non-GAAP license and maintenance revenue is expected to be in the range of $567.1 million to $568.6 million, representing growth of 7.9% to 8.1%.
Non-GAAP subscription revenue is expected to be $266.1 million to $266.6 million, representing growth of 23.7% to 23.9%. Adjusted EBITDA is expected to be $403.5 million to $404.6 million, representing an adjusted EBITDA margin of 48.4%.
And non-GAAP fully diluted earnings per share is expected to be $0.57 to $0.58 per share, assuming an estimated $320.2 million shares outstanding for the full quarter. Unlevered free cash flow as a percentage of adjusted EBITDA is expected to finish in the high 80% range for the year.
And finally, given the timing of our Initial Public Offering in today's earnings call, we wanted to give an initial high level view of our current expectations for 2019 total revenue and adjusted EBITDA. Despite not having completed the year, in the future, you should not expect us to provide forward year expectations on our third quarter earnings call.
We expect total non-GAAP revenue for the full-year 2019 to be in the range of $918 million to $933 million, representing growth of 10% to 12% versus the midpoint of our full-year 2018 total revenue guidance of $834.2 million. This also assumes the same 1.14 euro to U.S.
dollar exchange rate we use in determining our fourth quarter 2018 revenue expectations. We also expected 25 basis points to 30 basis points improvement in full-year adjusted EBITDA margins in 2019 as compared to expected 2018 full-year adjusted EBITDA margin of 48.4%.
We will provide a more detailed view of our expectations for 2019 performance on our year-end 2018 earnings call, which we expect to have in early February 2019. I'll now turn the call back over to Kevin.
Kevin Thompson
Thanks Bart. As you can tell from our discussion, we've been busy the last several years, expanding, scaling and strengthening on our business.
We have emerging new markets, developed new products and made a strong financial model even stronger. We believe we have assembled this in a technology that will allow us to take advantage of the areas of growth in IT infrastructure, such as public cloud and hybrid IT, while meaningfully increasing our market share in on-premise, private datacenter and hosted datacenter IT infrastructure management, as well as the MNC market.
We believe we have positioned SolarWinds in the center of today's IT infrastructure environment with the breadth and depth of technology coverage that no other vendor can match. We also believe that we have demonstrated our ability to enter new IT infrastructure market and successfully use our unique approach to building, marketing and selling technology to create market leading position.
So while we believe it remains a tremendous growth and profit opportunity in the IT infrastructure management markets where we compete today, and we will continue to apply a tremendous level of effort and focus to deliver that growth and profit. We also expect to continue to expand into new IT infrastructure markets.
In fact, we've been searching for the right opportunity to enter the infrastructure security and market for several years. And in the third quarter, we identified that opportunity.
We have set our sights on the vulnerability and threat monitoring portion of the security market and we were pleased to announce our entrants into the infrastructure security market with the release of SolarWinds Threat Monitor during the third quarter of 2018. Threat Monitor allows our users to monitor, respond to and report security threats through continuously updated threat intelligence data, log correlation and network and host intrusion detection.
Unless other areas of security, such as antivirus which we view as already commoditized, the vulnerability management market is right for our model, given the high cost and complexity of incumbent solutions. Threat Monitor is also a great example of a technology that we can sell and market to buyers across different parts of the IT and management arena and Threat Monitor turns in flavors for both IT ops team and manage security service providers or in MSSPs.
In the fourth quarter, we have already begun the expansion of our infrastructure and security portfolio through the ramp in SolarWinds Access Rights Manager, adding management and auditing of user access rights to the SolarWinds infrastructure securities portfolio. Access Rights Manager is a key ingredient for all IT ops teams who need to understand and react to insider security threats.
Access Rights Manager also delivers on SolarWinds' promise of making IT easy with an easy to use intuitive user interface and workloads that makes the day to day task of user provisioning and management much more simple. A unique and defensible model, more scale, strong visibility, solid growth, differentiated non-GAAP profit ability and high conversion rates of adjusted EBITDA and unlevered free cash flow, covered with an estimated $67 billion annual recurring revenue addressable market opportunity that leverage to the key fast-growing markets within IT management and IT infrastructure, that's SolarWinds today.
We hope you will join us in the next leg of the journey in building a great software company. With that, we'll open up the call for questions.
Operator
[Operator Instructions] Your first question comes from Heather Bellini from Goldman Sachs.
Heather Bellini
I have two questions. Kevin, you've said in the past that you want people to think about SolarWinds as more than just an SMB focused vendor.
And obviously, you already have penetrated 499 of the Fortune 500. So you've demonstrated your ability to get into the high end of the market.
But I'm just wondering if you could provide any comment on large deals that might have occurred during the quarter. And then the other question I had was, if you look at the outlook for your MSP business.
How do you see adoption evolving here and how do you view the competitive landscape? Thank you.
Kevin Thompson
So there is some large deals in the quarter, Heather, I mentioned that we've done -- we've had 697 customers over the last 12 months who spent over $100,000 with us, which means we're averaging about 175 customers a quarter that are doing transactions with us for over $100,000 and that's been relatively consistently growing over the last two or three years. And we've been growing the number of transactions we're doing in that trilling 12 month period by some of that 8% to 9% for a while now.
I think we should continue to expect us to do that. And that's really driven by the thousands and thousands of customer relationships we have.
We have over 275,000 customers around the world. Many of those have been customers for a while now.
We began those relations is very, very small but we built a number of multimillion dollar relationship with large companies and midsized companies, for that matter, and we have a high dependence on technology over the last number of years. So we've been averaging over the last four quarters about 175 deals over 100 grand.
I think you should expect that that number will continue to grow in a mid to high single-digit range as we move forward. As it relates to the MSP market, I think what we've seen is a really rapid move from SMBs trying to manage their own environment to asking MSPs to help them manage at least a part if not all of their environment, and I think that will continue.
About 45% of SMBs today are using MSPs. My view is ultimately we're going to end up with 70% or 75% of SMBs that are asking MSPs to manage all or a part of their environment.
There're always these small businesses where technology is really the lifeblood of their business, it's going to want to continue to do that on their own. So we believe there still a lot of growth opportunity in that market.
You should expect us to not only continue to add new customers to expand our relationships with those customers, but also to look for opportunities to bring new solutions to market that we can put on our MSP product platform to provide to those MSPs, so as they can provide those through to their SMBs. As Bart said, we're really focused on driving an improvement in our net retention rates, which are good.
We just happen to think they can get better over time. And that's true for not only the cloud management market but it's available true for the MSP market.
Operator
Your next question comes from Sterling Auty from JPMorgan.
Sterling Auty
So you talked about adding, I think north of 6,000 customers a quarter for the last eight quarters. How was the new customer acquisition this quarter, and how much of that was coming through the MSP versus traditional direct relationships?
Kevin Thompson
Yes. So once again added over 6,000 new customers in the third quarter, so we've continued that trend.
Now, the last nine quarters, we've added 6,000 or more customers and we added over 6000 customers in the third quarter. We haven't broken down how many our MSP versus cloud versus core IT.
So one has to that point of question, but we continue to add very consistent number of new customers and obviously it's a very large number of new customers we're adding on a quarterly and annual basis.
Sterling Auty
And one follow-up, I guess the repeating question. Your margins are really good.
You're still calling for expansion. Where do you think the bulk of the additional leverage will come from?
Kevin Thompson
Yes, so the leverage comes from two places. Bart mentioned that we think we'll get additional leverage out of product development because we've invested very aggressively over the last 3 years in building our hybrid, IT infrastructure management capabilities and specifically our cloud, the cloud management capabilities.
So we've spent so a high percentage of revenue in that part of our business than we do across the rest of the business. And as the revenue stream their growth, I mean because we now develop the really comprehensive set of capabilities, you'll see the R&D expense in that line as a percentage of revenue begin in just that's one area will come from.
We also believe that we'll see continued leverage, if you look at the global business installed and marketing as we continue to drive this very high percentage of recurring revenue from over 80% to higher than that overtime. And because I articulate that so high and we develop very low cost retention model that also will provide even low leverage.
And then lastly so we get relatively small amount is we do think our gross margins can expand a little as we move forward. Because our cloud management products are at this point not close to the overall corporate average of over 90%.
And I mean that our goal and our view that we can get those cloud management products to kind of a 90% gross margin overtime. So that's where you'll see that come from.
It's and if I'm gradually, -- we're going to control a rate in which our EBITDA margins are expanding. We don't want to get out in front of our sales, we don't want to set the bar too high to set, because we never have the ability to expand and we've shown that ability over the last 3 years.
You'll see us manage those expenses so we give you that kind of 30 basis points year. We're going to start to be pretty consistent about that for the next 4 to 5 years.
Operator
Your next question comes from Brad Zelnick from Credit Suisse.
Brad Zelnick
Excellent. Thanks so much.
I've got one for Kevin and one for Bart as well. For Kevin, we appreciate the preliminary look you've given us into 2019 that's really helpful.
What drives your confidence? And maybe beyond just having more recurring revenue.
How do you think about the predictability that you have today versus few years ago? And what macro inputs do you have baked into that projection.
And for Bart, can you just talk about the opportunity to move MSP customers to annual billing terms and the interest you're seeing from that market in doing so.
Kevin Thompson
Yes. So in terms of the way you look at our business and the level of predictability we believe we have.
Definitely a lot of that's been driven by the fact that over 80% of our revenue recurring that percentage has grown. Also when you look inside of that recurring revenue stream Brad, all of that's been driven by our customers and relationships we've had where we've had a very consistent level of growth from the relationships with those customers across our product line for the last 2 to 3 years.
So we have a very predictable view of how much our customer revenues are going to grow. And so we've got a lot of confidence that what we think the base level of growth is going to be as we look in 2019.
And that's what's included in the guidance that we provided. We've assumed but indicated -- we've assumed the currency market kind a stay kind of where they are now.
So we currently moved up or down that could have some impact on next year total revenue. We not assume that the IT and the environment is better than it now, we've assumed that we're going to see a spinning environment that is kind of where it is now and maybe it could be slightly moderated from where it is today.
We've not assumed some type of recession we've got I know some people want to talk about what's on CNBC in the morning, but I can't stop myself some day. So someday I get to see the bulls and someday you get the beards.
But we have assumed kind of neutral case to a slightly less favorable spinning environment than when we find ourselves in today. We have built a lot of very strong cohort that we believe in our customer base in 2018 as we have added new customers.
We think we have added a healthier set of new customers in 2018 particularly in the MSP side of our business which is going to give us a higher level of growth as we move into 2019 and beyond. So we have got a lot of confidence in kind of our preliminary view of 2019 obviously we will sharpen that view as we move through the end of the year and into early next year.
But we feel very good about that level performance for next year.
Bart Kalsu
And Brad as far as the upfront billing in our subscription product it's not just going to be with our MSP customers. Our plan is to try to get both our MSP and our cloud products on longer terms than just monthly, which was what they currently are.
We probably won't see annual billing with our MSP customers' annual billing upfront. We will gradually try to get our MSP customers to change some of their products over time and is really a focus for us in 2019.
So its not really anything that we can talk about at this point.
Kevin Thompson
Yes, and I think what we have indicated is we have got goals to get kind of $12 million to $15 million more enough from billings out of our as we indicated we have got about $270 million ARR subscription revenue stream as of the end of September. So we are not trying to drive 30, 40, 50 $60 million more of upfront billings.
We are trying to drive low double digits amount. We think that is very achievable and hopefully we can do better than that.
But we feel pretty confident we could do at least that.
Operator
Your next question comes from John DiFucci from Jefferies.
John DiFucci
I would like to get both Kevin and Bart's perspective on this question. Kevin you said that with this model even more powerful and more predictable and certainly its powerful model.
The predictability has been not always free in the past, but the greater the ratable mix which is a difference right now this time around. It'd be easier it is to do that on the top line, but what about the bottom line?
And the reason why I asked is because it looks little bit lower than we and I think the street model for fourth quarter EPS your forecast. Can you give a little bit light on this quarter's operating cash flow?
Have you just modeled it incorrectly or was this specific decision to invest a little bit more than expected? Or are you seeing something we didn’t consider previously?
I'm just -- go ahead.
Kevin Thompson
Yes, I think the bottom line for us has been incredibly predictable over the last 13 years I have been here. We have never missed the bottom line number.
We have always met or exceeded that number and in fact I think we have always exceeded that number over the last 12 or 13 years. So, we've got amazed really to whatever number we chose to manage through fourth quarter, what we have done for the fourth quarter really look at where we are for the year from the EBITDA margin point of view.
We are going to be at 48.4% EBITDA margin for the full year based on the fourth quarter EBITDA guidance we provided. We beat our expectations for the fourth quarter by a lot.
Bart Kalsu
For the third quarter.
Kevin Thompson
For the third quarter, I'm sorry, but it's quite a lot and so we didn’t really have a desire to be honest to beat the full year by that much. We really wanted the full year to be at around that 48.3% to 48.4% EBITDA margin.
And then we are going to get with our 30 basis points of expansion really every year as we move forward and we are going to really manage to that number. So you may see us beat a quarter, you may which happens quite often and then you are going to see us do our best in manage to that full year target because that’s what gives us the confidence and the ability to commit to that expansion over the long period of time.
So we wanted to be more thoughtful in the fourth quarter. We absolutely could be, I just want to be because they’re not going to put it and above that 48.4% ready to could put up meetings with higher than that.
Now what I will say is, if we beat the fourth quarter revenue number and that is obviously always our goal, then we are highly likely to be the EBITDA number for the fourth quarter, because you say with third quarter when our revenue numbers are strong, our EBITDA margins are very strong in over 49% and EBITDA margin for the third quarter, which is a very, very high level for us. And as we’re simply managing to that full year kind of 48.3%, 48.4% that we had targeted at the beginning the year, nothing more than that.
So, we’re going to choose to invest a little bit more in Q4 and hopefully got drive higher growth, which is landed up in this vicious circle will deliver a higher profit. But it really just a constant decisions or not let the profits get too high too early.
We’re trying to set a bar as we begin this journey as a public company again, that is one that we know we can drive and increase off of.
Bart Kalsu
Yes, John. I just want to reiterate what Kevin said and that is, we do manage to the full year number.
But that being said, within any one quarter if we do outperform on the revenue side, there is the opportunity for us to exceed adjusted EBITDA margin for that particular quarter. Kevin and I are usually pretty prudent, when it comes to allowing our managers to spend money and we, very rare to let them get ahead of us from a spin standpoint to put adjusted EBITDA at risk in any one quarter.
So there is the opportunity for us to beat, if we do exceed on that top-line. But at the end of the day, we’re going to manage to a full year number and try to get that number.
Kevin Thompson
From a cash flow perspective what I say is that, we were guiding the full year not quarter from a lot of free cash flow perspective. Quarters are going to move around a little bit and so it’s really hard that you end u to model specifically doing on any day when that, but we’ve got tremendous level of confidence in where will be for the full year.
Our conversion rate was in 80% in the third quarter already in the high-80s and our goal is to get that close to get it to 9 over the relatively near future. And we’re still on track to be able to convert our adjusted EBITDA there will be cash flow on an annual basis at that level.
It’ll move around a little bit on a quarterly basis. So, we don’t going to play a game in managing working capital.
We don’t find that to be a productive use of time. And so, we’re really confident that those conversion rates will be in that, you’ll hiring your range for this year and it will improve a little bit beyond that as we move into 2019 through kind of 2021.
John DiFucci
That’s all really helpful. So thank you and thanks for that perspective.
But I just one quick follow-up, by the way Bart I really like that word prudent, but just one quick question for Kevin. Kevin said, okay.
We’re going to move to spend a little bit more in the fourth quarter. Where we expect to see that spend a little bit more, I mean it’s just a little bit I recognize that.
Kevin Thompson
Yes. You can expect to be probably on the marketing, marketing is more prudent, we will obtain it carefully, and I don’t let them lighting on fire, just to finish.
But we expect a good return on it, but that’s where you’ll, the only place that we can spin any extra phones in a short window of time, because having people take time and having people to fixed costs to stay with us forever. And when we’ve got, we like for money, we feel like we want to spend, we’re going to finish in the variable area, where it doesn’t move with this into the next quarter.
Operator
Your next question comes from Matt Williams from Evercore ISI.
Matt Williams
Congrats and welcome back to the public markets. Quick question for you, Kevin, third quarter for you guys it’s generally been a strong federal quarter.
I was just curious if that helps to add-on circle license in this quarter? And then secondly one of the sort of Q1, so I think you’ve added to the sales model this time around is to, you add sort of a segments were installed base call in an installed base and there's actually a huge opportunity within that.
So, could you just talk about maybe the fed and then you're adding that installed base sales team that help people after that cross enough so opportunity maybe more effectively than last time you as a public?
Kevin Thompson
Yes. So, it means right to settle it for really longer, you have a very large percentage of our business.
It's a quite multiple remember we have a lot of success and we're able to do it in a way no one else can, which is great. We do it in our model and we don't know what the holds, we don't pay lobbyists all that kind of stuff.
So not a sales good quarter we had good international sale quarter. We had a good new American sales quarter.
So really all parts of our business contributed to the license performance that you saw in the third quarter, really as Bart indicated, all of our key product in key regions performed at a high level and that's something we've been working to drive you obviously for a long time now. So we feel good about really all areas of the business and how they performed.
On the incentive guide, that continues to be a really good opportunity for us. We are driving now and it's one of the things also gives us higher level predictability in the business.
You know all over 50% of our license sales today come from our customer base. Even on the license side and obviously in our subscription business the majority of revenue ares coming from customer because that's a match.
But even though in our licenses today well with 50% of our license sales come from our customers and there's a steadily higher level of predictability in terms of the pattern in which those customers buy. We now have teams all around the world that are calling into our customer base and it's actually our plan as we move into 2019 to increase the level of focus we have on selling into that very, very large opportunity we have.
As you guys know, we have a $4 billion dollar opportunity to sell into our core on-premise customer just the more of the core products that they don't own and that's a very large opportunity that we're attacking. We want to get more of that each year.
We're trying to drive our net retention rates up and the main way we're going to do that in our subscription business is to get our customers to buy more new functionality or use more of what they already have. So we're actually adding capability and focus even on our subscription product now to focus more on customer sales.
So that's been a your real success right over the last three to four years and we're going to continue to increase a little investment and we see a return on that investment meaning that we can do it at a profitable level.
Operator
Your next question comes from Walter Pritchard from Citi.
Walter Pritchard
Thanks. Question for Bart and question for Kevin.
Kevin on the on the security side you're definitely increasing your presence in this market you can talk about maybe impacts on the go to market if you can sort of follow the same model with those products across the board and then where are you getting those products into the MSP channel and then I have a follow-up for Bart.
Kevin Thompson
Yes, so Walter on the 35 we believe that we have picked part of the security market where we can leverage the exact same go to market motion that we have in networking systems management and then we have internet -- because they don’t go to and cloud management for that matter. Because go to market motions are kind of 97% the same and there is 3% nuance based who the buyer is and that's the way our view of the go to market for security will be also.
We take the parts of the market where we can build the technology we're very complete out of the box where it doesn't require professional services where you don't need a tremendous amount of assistance in implementing those technologies and we made sure that as we built get ready to release those products that they meet the kind of promise of a SolarWind product that they need to be easy to implement and they’ll be easy to use and they need to not require all of that. So we think we'll be able to use the same go-to-market motion that we've been using and you won't see us moving to a market where we don't believe we can do that.
You are going to make and mentioned before who we are part of the DNA as a business that's why we can run at the volume and velocity that we've been running. As far as the security market go or the industry market go, the variability threat monitoring product, we have a lot of excitement is related to the MSSP market.
So the main security for this provider market and also we do believe a member of our MSPs have a desire to provide some amount on security services. The question was usually they have a level of expertise that they need yet, ultimately they will have, I wouldn't say that a lot of them have it yet but I think they will be created.
But the MSSP market is already a managed service provider market where there's a good number of managed security service provider that we believe we can sell affordability and threat monitoring too. So we're already pushing that through both of those go-to-market motions, so we're saying moving on through the monitor now into the MSSP channel and we're also selling long range of monitoring into directly in the core IT buyer and that's a great, those great product that has the ability to sell to both set of buyers, you'll see us continue to look for technologies that we can either build or buy then we have the ability to sell the both of those market because it just creates a larger team for those product as we get them into the marketplace.
And then, I think you said you had a question for Bart.
Walter Pritchard
Yes, just quick question Bard. On the cloud side, cloud and MSP, could you help us understand maybe relative growth rate there versus last few quarters?
Is that business accelerating? Is it being holding steady?
Any color there?
Bart Kalsu
Yes. What we've talked about before is that cloud is the higher piece of our subscription revenue growth is growing at a higher rate than the MSP.
MSP obviously is a much bigger component of our subscription revenue and it's growing in that, it's just been consistently growing over 2018.
Kevin Thompson
Now, we're going to break those growth rates apart when you combine that revenue stream is growing in the low 20s right now, and we really feel good about the ability to have your strong growth rates and subscription revenue for a long time to come.
Operator
Your next question comes from Sanjit Singh from Morgan Stanley.
Sanjit Singh
Hi, thank you for taking the questions. And welcome back to the public markets, Kevin and Bart.
I wanted to talk about to the MSP-based on the subscription business overall, there's a lot of new offerings that you guys have put together and the innovation the product portfolio is pretty impressive. Can you give us a sense of, Kevin, of aware like how many services on average is the base have today and what did you see that going overtime?
Kevin Thompson
Yes, so we're selling it from -- you'll get all the subscription offerings we have on the MSP side. There is really two ways to look at penetration.
One is how many services is the MSP using from us? And then the other one the penetration is, how many of their customers are they delivering that service too?
So, you really have to look at it in both ways. So, we've got a higher penetration of the number of services the average MSP is using from our and that penetrates a really vary based on the product ranges from 10% to 15%, really to high from a 40% attach of the services that sit on the top of the basic platform itself.
But in the penetration rate in terms of if you look at the number of customers having and MSP has 100 customers for example. The number of those customers is delivering all those sources to actually because you've lowered them back.
So, it tends to be before in the mid 30s attached than the numbers of customers are providing that service to maybe you're 8 or 10 points less than that on the average. So, there's a big opportunities, growth opportunity not only to get into fees to buy more services from us to deliver for through their end users.
But even when they're using certain services, they're not providing those services through to their end users because they haven't convinced that end user why they need to have that service delivered to them. And so they're always focusing on pushing both of those opportunities.
So at least a large customer opportunity inside that in a fee base there is really two ways to grow which is little different they're not completely different but a little bit different than what it we came to see and see inside of a on-premise technology buyer.
Sanjit Singh
Very helpful. And then as my follow up.
On the cloud management side, you guys have some offerings that are frankly in some of the more, more exciting to face with in the pre structure software and APM, log management, log analytics, digital experience monitoring. Could you give us a sense of how you think about competing against some pretty well known competitors in this space.
They're not your typical large technology incumbents. And so where do you see or sort of opportunity there to grow some share in these fast growing markets.
Kevin Thompson
Yes. We'll start with our LR product but I get your point.
And so you'll get those cloud based on product I think we're going to compete in much the same way we've always competed, meaning we're going to make sure that we've got technology to solve the problems we choose to solve better than our competitors product solve them. We won't solve every problem they solve.
But the problems we choose to solve we're going to solve them more effectively. We're going to make sure that our price points are much more affordable than our competitors.
So if you look across our cloud management offerings, we're going to have between 70% less than our competitors to as much as 70% less than our competitors in price. So we're going to include a pricing advantage that others simply can't touch.
Because we've got a go-to-market motion in a business model that is just leaner which allow us to do that. And then we're going to leverage this high velocity digital marketing, it's all over the entire motion that we have been perfecting, it's not perfected -- cause it gets better all the time.
But we've been perfecting for the last 13 years that I've been here to move in a velocity that other simply can't. We've got over 30,000 paying customers across our cloud management products that's actually more customers than most of those companies you're referring to have.
Now we've only metriced method slightly better competitors maybe then the really large competitor that we still less in the on-premise world. But if you look back 13 years ago when we got here and we were very, very small, the CIA that we called to be brought by Broadcomm and AC on the software side and you have to get brought by micro focus and the others that are they're requested have to brought by Dell and the list goes on.
They were just competitors 13 years ago, so we simply out competed them. And it's our view we're going to do that again we're going go and disrupt the market.
We've got a broader set of technologies than those companies have. We have on-premise coverage they simply don't have and never will have -- because they just going to take them 20 years to create the capabilities we've created on-premise.
While we're trying to do that then we'll take the market that are in today away from them. So I think we got the same set of competitive advantage.
They maybe I'm little bit younger in terms of age of company, but the method all of us have make-- that an outside sales guys are doing custom contract, they're customizing their technology for individual customers. All those things will them down.
Those are things we simply refused to do. And so that competitive base, we've created will come into play, it will allow us to be disruptive.
It may take a little bit longer we believe that absolutely will happen.
Operator
Your next question comes from Kash Rangan from Bank of America.
Kash Rangan
Hey guys. Congratulations on going public again.
I've two questions. One Kevin for you.
With respect to the log market and the infrastructure security market, you talked a lot about your go-to-market as being a source of differentiation. And you also acknowledge that the cast of competitors is going to be slightly different and that the go to market approach that has worked so well for you in other markets maybe probably ought to be tweaked, your thoughts on that as to how you can compete more effectively.
Is it really the go to market that's the competitive differentiation or is there going to be a product differentiation that is going to help you be successful in security infrastructure in the logging market? And second and final for you Kevin.
You've lived through cycles many cycles before I'm curious what are the some of the indicators that you're looking at to help you get a good gauge of based on your products paying interest so how you could see a potential downturn or not so much of a downturn that we might be fearful of that you actually don't see. I am curious how you looked at it.
Kevin Thompson
Yes. So, the competitive differentiation in log management and in the security market won't simply be our go to market motion that does give us an advantage.
Our ability to reach buyers of all sizes all around the world through a digital marketing motion our ability to close transactions of all sizes and for that matter levels of complexity forms on the inside allows us to test many, many more customers than these competitors we have can because they've adopted those traditional outside sales model and professional services and all the things that slow you down. But we also believe we will have and do have even today our technology advantage, our technologies are easier to use because we design that in from the beginning.
Our technologies are a lighter weight. Our technologies are intuitive.
We really focus on the UI and the user experience to make sure that we're building the product the way the user wants it built. Our very large user community which we've been investing in for a number of years now, it's an advantage in whatever product area we move into because we get direct feedback and direct research from thousands of technology products in a way that none of our competitors can.
So the competitive advantage really does extend beyond the go to market motion. I don't think it's going to have to be tweaked very much because the dead opt buyer and the IT opt buyer behave in very much the same way in fact we're finding that even more likely to buy to try and buy without talking to us at all.
You’re right, broadly meaningful percentage of our cloud management product revenue today subscription revenue is not just low touch its zero touch our customer comes puts a quarter in the slot and they start to use the technology and we'll start to generate revenue from them before we ever talk to them. Now unless they start using it for a long way to go talk to them and see if we can increase the size of the relationship more rapidly than maybe they're growing it on their own.
But we are seeing its very low touch models there, our productivity per sales rep has actually gone higher, in our cloud management product right now and it is the very same motion that we're leveraging on-premise. And further away to kind of economic environment and buying the buying environment and what do we look for, I think we've got a couple of advantages in that we not just saying to large enterprises, large enterprise budget cycles behave in a very different way from smaller midsized businesses budget cycles, meaning a small midsize business is going to be much more dynamic in how they manage their business.
If they start to see impact on their business, so what happens to being or what might be happening in the global environments. So, I think if you look back historically at our performance during difficult economic periods, our growth rates were higher than all of our peers during those periods of time because the budget starts to contract.
And we're definitely not seeing that right now and we have one of the strongest license sales quarters we've seen in a long time. We had a very good maintenance renewal quarter with maintenance renewal rate at around 95%.
In the third quarter we had a good subscription revenue growth. We're not seeing any indications but I believe we will see them earlier than some of the large enterprise focused vendors as well because large enterprise budgets take a long time to be written to, start to be reduced where the smart business is going to react a little bit faster.
So, we take our price advantage. We think the fact that, we can give to a level of price that no one else can touch, we solve problems that have to be solved not problems that are nice to solve.
So you have to keep your infrastructure up and running, no matter what happens to be going on in your business or in the economy. And so we think all of that gives us an advantage, if we end up an environment like that, but it’s not really my expectation right now.
It’s not what we’re seeing. We’re not getting those signals from CIOs.
And more importantly, we’re not getting those signals from the IT and tech pros that we are engaging with every single day at this point. So really I think we needed that now, but I think that’s how we play out, if we were to end up in that kind of environment.
Dave Hafner
And Mike, we have time for two more quick questions.
Operator
Your next question comes from the line of Terry Tillman from SunTrust.
Terry Tillman
And I’ll also like to offer congrats and welcome back to dealing with all of our questions. A lot of the good juicy questions on your new or higher growth businesses have been asked.
So I won’t repeat some questions there. So maybe I’m going to focus on license revenue.
I think one of the comments was 10-year sales leadership that is helped? Maybe you kind of talk about that a little bit more and why couldn’t we see license growth, maybe not at this level, I’m not going to try to pin you down with an 8% growth every quarter, which is good, but maybe some greater vitality in that license business going forward given some of the leadership changes?
And then I had just a quick follow-up for Bart.
Kevin Thompson
Okay. So I mean, when you look at the leadership team we built over the last three years.
That team is comprised of a number of customers it’s a very long time. The gentleman who runs that business has been around almost as long as I have, he started out in business development and worked his way up and so you’re reporting directly to me and he's running our global sales org.
And so he's been in that team for a very long time. He's done a very nice job of complementing a seasoned and experienced for win team with some really strong leaders from the outside, who have brought a lot of great people management capability, they challenge that way we think to make sure that we’re optimizing our motions.
And they’ve done a really great job particularly internationally in delivering some very, very strong levels of consistent growth over the last two years. So we feel very good about that team.
And we’ve done a good job, I think in the subscription side of our business, particularly in the fee we’re leveraging some really seasoned, knowledgeable leaders who’ve been with us for a long time. We put some very strong leaders underneath them, some which we grew and some which we brought in from the outside.
We think this is a very nice mix always experience, outside experience, which I think is giving us a really good level of performance right now. And then we also like to growth, when we started, we believe, we can grow license revenue not committing to 8%.
But we believe the opportunity is there to continue to take share or continue to see an increase in spin and on-premise IT infrastructure. We have now created the ability for you to manage the public cloud from our on-premise IT management product.
So you can see what’s going on in both the public cloud and on-premise and in the connection in between, through the same user interface, which increases the market opportunities for those on premise product. We also have the ability to deploy those on-premise products in any of the public cloud.
So you want to deploy those on-premise products in a public cloud and manage your cloud environment with them, you can, and you also buy those from us through a license model, because we will offer them through a subscription model at this point we don’t intend to. So we do believe we can grow license revenue.
We’re not dependent on growing license revenue to deliver the level of growth in the business that we want to deliver. We’re actually focused on doing that and we do think that opportunity is there and something we’re driving that.
So I think there’s a reason we can't, we’re just not, we haven’t committed to a defined level of license growth and we don’t or not dependent on it in a way we were in the past, we absolutely our trying to drive it.
Terry Tillman
Okay, awesome. Thank you for that.
And I guess on that retention rate for next year Bart, you gave us the preliminary revenue. It's a high level this question, but are you serving about that saying 105% retention rate or do that is assume it's just a little higher?
Bart Kalsu
Yes. In our model, Kevin, we just, we've modeled inconsistent net retention rates in 2019.
Dave Hafner
Okay. Kevin, we have time for one more question.
Operator
And your final question comes from the line of Matt Hedberg from RBC Capitals.
Matt Hedberg
Hey, guys, thanks for taking my question. I'll keep it short.
Just one here. Kevin, you guys are extremely broad geographically I mean 190 countries or maybe more than that right now.
Can you talk about, was there any broad strokes of international success you'd call out and I guess when we think about heading into next year as a lever of growth? How do you think about balancing investments overseas versus domestically?
Kevin Thompson
Yes, we've been seeing that international business as a whole, growing faster rate for the last couple of years than our domestic business in most quarters and on an annual basis for sure. We think that we'll continue, globally we win about 35% of our revenue it's not the whole product lines is outside of North America.
Some of the products are slightly more than that. But in total it's only about 30% of our revenue outside the U.S.
We do believe hopefully that ought to be more like 45% of our revenue, should be outside the US. Cloud management is all North America right now, for example.
So there is a big growth opportunities outside North America was really haven't put any reps outside North America to sell those products yet are in those key product revenue, subscription revenue is a little more global in nature than the total. So you should expect an international and it's my expectation that international will grow at a slightly higher rates than our Americas business will grow as we look forward.
You invest a lot of we're investing more and more, we're trying in different areas of our business, at very similar level of profitability. But we will make different investments in different quarters, if we're trying to expand into a region, so we recently expanded a little more aggressively into Germany for example, because that's not a big market for us as it ought to be it's much smaller than the UK.
And ultimately, it ought to be bigger than the UK, if you just look at IT spending in the dot markets. And so we're making investment there.
So you will see quarters maybe or maybe 6 months at a time where there's investments levels will shift the little, but because we [indiscernible] kind of invested so quickly, it's not going to move the needle in any meaningful way. And with that, we're going to wrap the call out.
We appreciate the questions and the attendance and we look forward to continue to interact with you guys. Thanks a lot.
Operator
This concludes today's conference call. You may now disconnect.