Solarwinds Corporation (SWI) Q3 2021 Earnings Call Transcript

Solarwinds Corporation (SWI 0.27%)
Q3 2021 Earnings Call
Oct 28, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone. My name is Chris, and I will be your conference operator today. At this time, I'd like to welcome everyone to the SolarWinds third quarter 2021 earnings call. [Operator instructions] Thank you.

Dave Hafner, head of investor relations. You may begin.

Dave Hafner -- Head of Investor Relations

Thank you, Chris. Good morning, everyone, and welcome to SolarWinds third quarter 2021 earnings call. With me today are Sudhakar Ramakrishna, our president and CEO; and Bart Kalsu, our executive vice president and CFO. As Chris mentioned, following our prepared remarks, we'll have a brief question-and-answer session.

This call is also being simultaneously webcast on our Investor Relations website at investors.solarwinds.com. On our Investor Relations website, you can also find our earnings press release and a summary slide deck, which is intended to supplement our prepared remarks during today's call. Please remember that certain statements made during this call are forward-looking statements, including those concerning our financial outlook, the impact of the cyber incident on our business, our market opportunities, the impact of the global economic environment on our business, and the spin-off of the N-able business. These statements are based on currently available information and assumptions, and we undertake no duty to update this information, except as required by law.

These statements are also subject to a number of risks and uncertainties, including the numerous risks related to the cyber incident and the recently completed spinoff of the N-able business. Additional information concerning these statements and the risks and uncertainties associated with them is highlighted in today's earnings release and our filings with the SEC. Copies are available from the SEC or on our Investor Relations website. We completed the spin-off of the N-able business on July 19, 2021, and accordingly have included the results of the N-able business as discontinued operations for the current and historical periods.

Therefore, the financial results presented on this call reflects SolarWinds as a stand-alone business and do not include any contribution from the N-able business. Furthermore, we will discuss various non-GAAP financial measures on today's call. Unless otherwise specified, when we refer to the financial measures, we will be referring to the non-GAAP financial measure. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call are available in our earnings press release and the summary slide deck on the Investor Relations page of our website.

We note also that because there was no impact of purchase accounting on revenue in the third quarter, our non-GAAP total revenue is equivalent to our GAAP total revenue in this period. Going forward, we will begin to present certain financial measures on a GAAP basis only. With that, I'll now turn the call over to Sudhakar.

Sudhakar Ramakrishna -- President and Chief Executive Officer

Thank you, Dave. Good morning, everyone, and thank you for joining us today. I hope you're doing well and staying safe. I want to start by first thanking our employees, customers, partners, and our shareholders for their ongoing commitment to SolarWinds.

As many of you know, we will hold our annual Analyst Day meeting on November 10, 2021. During this virtual event, we look forward to then share our vision for SolarWinds and how we plan to retain, evolve, and grow to build an even more successful business. Given the proximity of this call to the Analyst Day event, our comments today will be a bit shorter than normal. As we move our discussion of financial and operational highlights for Q3, I've described our performance and continued progress.

I attribute the progress to the dedication of our Celerion, the relevance of our solutions to address our customer needs, and the commitment of our partners and customers to SolarWinds. For the third quarter, we delivered revenue above the high end of the range of the outlook we provided with total revenue ending the quarter at $181.3 million. Third quarter adjusted EBITDA was $75.3 million, representing an adjusted EBITDA margin of 42%, exceeding just the high end of our outlook. As I outlined in the Q4 2020 earnings call, customer retention is a top priority in 2021, and we continue to make great progress toward this goal in Q3.

Our Q3 maintenance and annual rate of 88% was above the low to mid-80% renewal rate we noted we expected in 2021. Customer retention remains a key priority. And with our growing portfolio of offerings, we believe we have a great opportunity to continue to grow our LTV and net retention rates with our large customer base. While we continue to be able to offer flexible pricing, purchasing options to our customers, we are increasing our focus on subscription bookings and we expect to continue to increase the mix of subscription in these upcoming quarters and years.

In Q3, our subscription revenue grew at a 20% year-over-year rate with subscription ARR growing 23% year over year. Bart will provide more color on how this part of our business will trend in Q4 and beyond, given the skew that the SentryOne acquisition timing creates. We have completed now the successful spin-off of the N-able business in July, and that has enabled us to plan and execute our stand-alone strategy, the details of which we look forward to sharing with you at Analyst Day. Our global system integrator and enterprise motions are resulting in larger subscription deals.

Noteworthy here is that customers are investing in our entire solutions offering and taking advantage of our simplified packaging and the pricing. These solutions are the underpinnings of our upcoming SolarWinds observability solutions, which we look forward to sharing more details about at our Analyst Day presentation. We will also highlight our views on our [Inaudible] solutions potential to be a growth driver in the coming years through a comprehensive and differentiated approach to observability compared to the alternate. Our product teams made significant progress in Q3, delivering these new elements within our solutions that are designed to drive additional value to our customers based on their evolving needs, including updates to our database and ITSM solutions as well as Secure by Design initiatives that impact our entire product portfolio.

We have also extended the breadth of our database monitoring portfolio's platform support, which now includes Google cloud extensions and added enhanced integration, including with Microsoft teams to our ITSM solutions. Increasingly, our application, database, and ITSM offerings will become integral elements of SolarWinds' observability that -- as we create -- as we support customers of all sizes with their IT, Dev, and SecOps requirements. We believe that this will help differentiate our offerings from all -- from those of the other vendors. We are expanding our global partner engagement with events in various geographies.

The global partners, including GSIs, cloud service providers, and MSPs, are critical to expanding our GTM reach and to jointly deliver customer success. Differentiated offerings with rich enablement, incentives, and a spirit of mutual accountability are the underpinnings of our partner strategy. In September, we celebrated the Seventh Annual IT Professionals Day holiday, which was originally established by SolarWinds here in 2015. IT Pro Day recognizes and celebrates all IT professionals and the contributions they make to their business every day.

As part of the celebration, we released findings from our IT Pro Day 2021 Survey, Bring It On, which then revealed IT [Inaudible] confidence and [Inaudible] in their roles. We were also able to recognize four IT professionals nominated by their peers in our second annual IT Pro Day awards. We also believe that IT professionals showed their true grit under challenging conditions this past year and deserve recognition and appreciation for their efforts, commitment, and resiliency. We continue to attract excellent talent across all functions of our organization, and we are selectively adding our footprint in international regions, including most recently in South Korea and parts of our EMEA region.

With that, and I'll turn it over to Bart to provide more color on our financial performance and outlook.

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Thanks, Sudhakar, and thanks again to everyone joining on today's call. I'll discuss our SolarWinds results on a stand-alone basis. As most of you know, our spin of the N-able business happened earlier this quarter and was effective on July 19th. Therefore, these results are reflected as discontinued operations in our third quarter financial results.

Also, a quick reminder that the guidance for the third quarter that I provided in August did not include any impact from N-able as the spin had been completed at that time. Once again, our public filings will present N-able as discontinued operations in the third quarter as well as in prior periods for a much better comparability. Our third quarter financial results reflect another quarter of improving execution while demonstrating the resiliency of our model. That execution led to another quarter of better-than-expected financial results for the third quarter with total revenue ending at $181.3 million, above the high end of our total revenue outlook of about $176 million to $180 million.

For the third quarter of 2021, there was no impact of purchase accounting on revenue, so our non-GAAP total revenue is equivalent to our GAAP total revenue. Total license and maintenance revenue was $149 million in the third quarter, which is a decrease of 6% from the prior year period. The maintenance revenue was $120 million in the third quarter, which is up slightly from the prior year. Our maintenance revenue has been impacted by a combination of year-over-year declines in license sales for the past eight quarters and a reduction in our renewal rate in 2021.

The trend of this lower license sales intensified with the COVID-19 pandemic in the first quarter of 2020 and because of the introduction of subscriptions of our licensed products in Q2 of 2020 as well as the SUNBURST incident in December of 2020 as we focus more for our efforts on longer-term customer success and retention rather than maximizing near-term sales. Although maintenance renewal rates have remained lower than historical levels since SUNBURST, we are encouraged by the fact that they have improved throughout the year. Our expectation at the start of the year was that maintenance renewal rates this would be in the low to mid-80s. On a trailing 12-month basis, our maintenance renewal rate is 89%.

Working with our customers had been a top priority this year. Also consistent with recent quarters, we want to provide the in-quarter renewal rate for the third quarter, which currently stands at approximately 88%, which again is above our expectations at the start of the year. For the third quarter, license revenue was $29.2 million, which represents a decline of approximately 26% as compared to the third quarter of 2020. On-premises subscription sales resulted in an approximately 11-percentage-point headwind to license revenue for the quarter.

The remainder of the decline in license revenue reflects the combination of an impact of that cyber incident and the continuing impact of the COVID-19 pandemic. That said, our new license sales performance with commercial customers has improved sequentially each quarter during the year. And while we have continued to sell to customers in the federal government and have had some key wins post-SUNBURST, new sales to customers in the federal space overall has been a challenge this year. We have an incredibly committed federal team, who's now the primary focus has been on working with customers and maintaining the security and stability of their environment.

Moving to our subscription revenue. Third quarter subscription revenue was $32.3 million, up the 20% year over year. This increase is due to the additional subscription revenue from SentryOne products as well as increased sales of our on-premise subscriptions as part of our early efforts to shift more of our business to subscription. Total ARR have reached approximately $624 million as of September 30, 2021, reflecting year-over-year growth of 9% and is up slightly from our ending Q2 2021 ARR balance of $621 million, which is the corrected amount included in our 8-K filing from earlier this month.

The growth in ARR is that primarily due to the incremental revenue of SentryOne, which we acquired late last year, and our efforts on sales of our products at on-premises subscription. Our subscription ARR of $130.2 million increased 23% year over year and 9% sequentially from the second quarter. So we finished the third quarter of 2021 with 786 customers that have spent more than $100,000 with us in the last 12 months, which is a 4% improvement over the previous year. We are continuing our efforts will build larger relationships with our enterprise customers, which we will talk more about at our upcoming Analyst Day next month.

We delivered a solid quarter of our non-GAAP profitability. Third quarter adjusted EBITDA was $75.3 million, representing an adjusted EBITDA margin of 42%, exceeding the high end of the outlook for the third quarter despite continuing to invest in our business. Excluded from the adjusted EBITDA are onetime costs of approximately of the $2.9 million of cyber-related remediation, containment, investigation, and professional fees, net of insurance proceeds. I do want to clarify that these cyber-related costs not included in adjusted EBITDA are onetime and nonrecurring.

They are separate and distinct from our Secure by Design initiatives, which are aimed at enhancing our IT security and supply chain process. Costs related to our Secure by Design initiatives are and will remain part of the recurring cost structure as we go forward. We expect onetime cyber-related cost to fluctuate in future quarters but to be less in future periods. These onetime cyber costs are, however, difficult to predict.

They not only include the significant cost of the forensic investigation efforts we substantially in May but also costs associated with our ongoing litigation, government investigations, and any potential judgments or fines related and -- as well as related professional fees. We expect our insurance coverage and offset a portion of these expenses and will be presented net of insurance proceeds. Net leverage at September 30 was approximately 3.8 times our pro forma trailing 12-month adjusted EBITDA. We retained the full amount of the $1.9 billion in term debt that the company had at present.

During the third quarter, we completed a two for one reverse stock split and declared a dividend of $1.50 per share on this post-split basis, which was paid in August. In addition, N-able repaid $325 million of inter-company debt. As a result of this repayment, our cash balance is $709 million at the end of the third quarter, bringing our net debt to approximately $1.2 billion. Our plan is to keep that cash of our balance sheet for the foreseeable future.

We believe we have favorable terms on our debt, so we intend to maintain flexibility as it relates to our cash on balance sheet. Our debt matures in February of 2024 and we expect to revisit our level of gross debt as we get closer to that date. I will then now walk you through our outlook before turning it back over to Sudhakar for some final thoughts. We are providing guidance for the fourth quarter of 2021 for total revenue, adjusted EBITDA, and earnings per share, and we will tell you what that means for a full year.

For the fourth quarter of 2021, we expect total revenue to be in the range of $180 million to $184 million, representing a year-over-year decline of negative 3% to negative 1%. Adjusted EBITDA for the fourth quarter is expected to be approximately $72 million to $74 million, which also implies an approximately 40% adjusted EBITDA margin. Non-GAAP fully diluted earnings per share is projected to be $0.25 to $0.26 per share, assuming an estimated 160.7 million fully diluted shares outstanding, which reflects the reverse stock split completed on July 30. And finally, our outlook for the fourth quarter assumes a non-GAAP tax rate of 22%, and that we expect to pay approximately $8 million in cash taxes during the fourth quarter of 2021.

For the full year, we expect total revenue to be in the range of $712 million to $716 million, representing a year-over-year decline of negative 1% to flat with prior year. So our adjusted EBITDA for the full year is expected to be approximately $297 million to $299 million, which implies an approximately 42% adjusted EBITDA margin for the year. Non-GAAP fully diluted earnings per share is projected to be $1.14 to $1.15 per share, assuming an estimated 160.5 million fully diluted shares outstanding. As you think about the components of revenue in the fourth quarter, it is important to remember that we acquired SentryOne last year in late October.

We expect our subscription revenue growth in the fourth quarter to be in the high single digits. However, looking ahead to 2022 and beyond, we intend to continue to expand our subscription offerings while turning new subscription sales a much higher priority with our sales team. Based on what we've seen year-to-date, we expect that maintenance renewal rates will be in the high 80s for the fourth quarter and anticipate continued progress throughout 2022. And in the near term, we expect the maintenance revenue will continue to be relatively flat to slightly down compared to prior year periods.

So as we think about EBITDA margins for the rest of the year and into 2022, the costs associated with our Secure by Design initiatives, investments in transitioning our product portfolio to a greater subscription mix and our continued investments in our sales and marketing initiatives are factored into the margins in the short term. We anticipate that accelerating margins again in the future, but believe that these investments are now necessary. We will talk more about these initiatives at the Analyst Day on November 10. With that, I will turn the call back over to Sudhakar for his closing remarks.

Sudhakar Ramakrishna -- President and Chief Executive Officer

Thank you, Bart. Our team's competence, commitment, and attitude continues to be on display as we delivered a strong Q3 performance, exceeding outlook in both total revenue and adjusted EBITDA. We are executing our mission to help customers accelerate their business transformation via simple, powerful, and secure solutions for multi-cloud environments. In Q3, we introduced an early adopter program of SolarWinds' observability to select customers.

These customers currently under maintenance has the great opportunity to make an early move to subscribe to our offerings and begin a journey to multi-cloud with SolarWinds as a strategic partner. By eliminating customer complexity and meeting them where they currently are, we believe we are uniquely positioned to protect investments while increasing our relevance to them over time. We expect this motion to become a mainstream activity in our upcoming quarters and a significant contributor to our subscription and ARR. In Q4, we have continued to execute on the initiatives that I outlined during our Q4 2020 earnings call, focusing on customer retention and demonstrating ongoing progress in subscription, license, and maintenance growth across geographies and sectors.

I'll conclude by again thanking our employees, partners, and customers for their commitment to SolarWinds. We hope to see you all on November 10. Bart and I will now be happy to address your questions.

Questions & Answers:

Operator

[Operator instructions] Our first question is from Matt Hedberg with RBC Capital Markets. Your line is open.

Unknown speaker

Hi. This is Nisha for Matt Hedberg. Thanks for taking my question. Maybe to start with, could you talk about how Q4 is looking from a new bookings perspective, given Q4 is your biggest new bookings quarter?

Bart Kalsu -- Executive Vice President and Chief Financial Officer

So, yes. We -- obviously, the new bookings for the fourth quarter is factored into the range that I provided from a total revenue perspective. It also, as you said, is our biggest quarter. We talked about commercial bookings that's trending positively through the year and we expect that to be the case as well in the fourth quarter.

Unknown speaker

Got it. And my second question, given it has been over 10 months since the breach, if you could provide us an update on how the conversations with our customers have evolved from Q2 to Q3? Maybe give us an update on the renewal trends? You have noted an uptick in the renewal rate at 88%, which is great. And so I know that on the last call, you've noted in the past that customers have been taking -- customers have taken longer to buy. Have you seen that ease in Q3?

Sudhakar Ramakrishna -- President and Chief Executive Officer

So let me address that first. First of all, on the renewal rate, as you highlighted, we exceeded the range that we previously provided of low to mid-80s by delivering at 88% renewal rate in Q3, which, as you have observed, has been trending higher throughout this year. What we anticipate is that that trend will continue as we go into Q4 and into 2022. Now to your previous question as to how our customer conversation is going, I would classified that as in Q1 and Q2, most of the customer conversations were related to the actual incident itself in terms of what happened, how did it happen and so on.

And these days, the conversations are more about our learnings from the incident, the improvements that we have made in Secure by Design and how we can apply to those improvements to customer environments because many of our customers are also producers of software and they obviously want to deliver secure software as well. So in that regard, we are becoming of more strategic to our customers rather than simply be a technology supplier.

Unknown speaker

Got it. Thank you.

Operator

The next question is from Sterling Auty with JPMorgan. Your line is open.

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

Yes, thanks. Hi, guys. So maybe just following on that a little bit. I'm just curious in terms of new logo traction in the quarter in the enterprise, you mentioned what was happening in government but what it is specifically did you see in terms of new logos on the enterprise side? I mean do -- is there any particular product area that particularly is resonating?

Sudhakar Ramakrishna -- President and Chief Executive Officer

So first, I'll take a shot at that, Sterling, and if you have a follow-on question, please see ask as well. We are seeing traction all across our portfolio. So starting with our Orion platform, including through some of our partners, such as the GSIs that I mentioned in my prepared remarks, Sterling. Additionally, database monitoring has been part of our portfolio now for almost -- the SentryOne, and I should say, almost for a year with additional components in our database monitoring, which is also seeing very good traction both with, call it, our velocity motion as well as our enterprise motion.

And then more recently, we have started packaging and integrating these solutions, call it, in a better together fashion. And this is -- what I noticed is that some of the enterprise customers are preferring that entire portfolio approach because it gives them optionality to leverage the technology in multiple ways. So broadly speaking, all across, I don't think it's one concentrated part of the portfolio.

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Yes. And, Sterling, from a customer account standpoint, the trend in the third quarter has been consistent with what we've seen in every other quarter and as it's trended over just the last couple of years. I mean we even had this typical spike in the third quarter. And we hope that that will happen again in the fourth quarter as well.

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

All right. That makes sense. And then one follow-up -- I'm sorry, go ahead, Bart.

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Well, I gave the number in the script at 786 customers. That's the number that we've focused on in the past, and that trended up as well this quarter.

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

That makes sense. That makes sense. One other area is you mentioned observability a couple of times. And is the observability kind of suite of package or bundle, going to be focused or behind the firewall applications, in the cloud, hybrid? What's really going to be kind of the focal area that you're really trying to zero in on?

Sudhakar Ramakrishna -- President and Chief Executive Officer

It does. Sterling, I'll address that. It will be a combination. Our trajectory is to go toward multi-cloud.

That obviously includes hybrid in our context, so it will be across the board. And what has been appealing to our customers is the point that I was making about meeting them where they are today and extending them into the cloud. While some customers are -- let's call it completely cloud native, and that's fine by us, many of our customers rely on hybrid environments. And we are able to now provide quite an effective bridge, so to speak, for them.

And that's been the topic of conversations as it relates to the early adopter program that I mentioned. So, we are seriously in early days on that, and we will continue to drive traction on that. And then from a solution detailed standpoint, we look forward to presenting them at the Analyst Day.

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

Sounds good. Thank you.

Operator

The next question is from Sanjit Singh with Morgan Stanley. Your line is open.

Sanjit Singh -- Morgan Stanley -- Analyst

Thank you for taking the question. I had a question more on kind of the shape of the revenue curve, what some of the factors have influenced that growth, and how should we think about that going forward? And that's specifically related to a couple of factors, but I was just hoping that you could comment on, one, what has been the impact on revenue growth from the shift to subscription? If you could just walk through the unit economics and the breakeven time lines for a deal that's actually driven by subscription versus a deal that's coming in through license and maintenance? That's number one. Two, the impact of COVID. And three, the impact of the breach.

How are those trend lines shaping across those three metrics to form this view of growth going forward?

Sudhakar Ramakrishna -- President and Chief Executive Officer

So, yes, Sanjit. So the -- to answer the first question, we -- the shift in subscription mix for us was an 11% headwind to our total revenue number for the quarter to license revenue in particular there. Then your question about how much of it is related to COVID-19 versus the cyber incident, that's a little harder to quantify. What I would tell you is that I think we're getting the pandemic kind of behind us that at this point and most of the impact from a license -- or from a growth perspective right now is due to the SUNBURST incident.

We're obviously seeing less and less as we get further away from last December, but the trend has been improving.

Sanjit Singh -- Morgan Stanley -- Analyst

Understood. And then a last question, and it goes sort of back to growth but this time, just -- I'm sorry, Sudhakar? You were going to say something?

Sudhakar Ramakrishna -- President and Chief Executive Officer

Yes, I just wanted to clarify or extend a point that Bart made as well on the new license bookings. I just want to remind everybody that starting, let's call it, the middle of December all the way through to end of Q1, most of our demand in activities were essentially put on pause as we work with customers to then bring them back here on track and really focus on the security of their environments. And so we have to kick it back into gear, let's call it, in Q2. And so that -- you're seeing some of the positive effects of that as well and that you should continue to see that going forward as well.

Sanjit Singh -- Morgan Stanley -- Analyst

Understood and very well noted. And then the next question I have is around subscription growth and ARR. So the ARR growth has been hovering in 20% range for subscription. And then for 4Q, you're sort of pointing us to 9% growth.

And I know there's some inorganic contribution but if -- I was wondering if you could sort of draw that or provide this bridge for us on the -- why subscription revenue growth would decelerate to the extent that it has given the 20% subscription ARR growth that we've seen over the last couple of quarters?

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Yes, the subscription ARR growth, it obviously takes the -- takes what our ending run rate is and annualizes that number, Sanjit. And so here obviously, the subscription revenue that we picked up from SentryOne, we get a bigger impact of that when you annualize that number. You'll see -- that's why I guided for the fourth quarter that you'll see more of what the organic growth is in the fourth quarter because we are coming up on the anniversary of the SentryOne deal. So subscription revenue will grow in the fourth quarter will be in the high single digits.

Sanjit Singh -- Morgan Stanley -- Analyst

Understood. Appreciate it. Thank you, Bart.

Operator

Our next question is from Rob Oliver with Baird. Your line is open.

Rob Oliver -- Baird -- Analyst

Great. Hi, guys. Good morning. Thank you for taking my questions.

Bart, in your comments, you talked about some of the challenges in new sales to Fed, and I think that makes absolute sense. But just curious on Fed retention and that's how you guys felt in the quarter relative to some of those Fed renewals in the fiscal year end -- I know Sudhakar, you had mentioned customer retention was really No. 1 focus for you guys through this period and you've done a really nice job, I think, to be able to manage a really unprecedented [Inaudible]. But just curious relative to U.S.

Fed, in particular, did you see a churn out of U.S. Fed? Were there agencies that walked away? So, just how do you characterize that opportunity?

Sudhakar Ramakrishna -- President and Chief Executive Officer

Bart, I'll take a crack at it, and Bart will add to it. First of all, as you can imagine, if you were to look at a customer curve on helping our customers with their environments and security, the Fed customers, they acted a little longer than the commercial customers that you're seeing in the new license sales as well. That being said, on overall blended rate of 88% renewal rate, if I were to break it down simply as Fed, it still turned out to be over 80%. That's not a segment that we normally break out.

But if you put that in context, and that is just a very good result even in a sector that had the longest arc of recovery, so I'm encouraged by that. And as I mentioned, we have a super dedicated Fed team and our customers have also been very supportive of us, including in the Fed sector.

Rob Oliver -- Baird -- Analyst

Got it. OK. That's very helpful. And then just one general question.

I know we're going to get a lot of detail at the analyst event but that's been talk about observability and DevOps. And historically, you guys have had a really good reputation with those IT professionals and is there any thought about revamping the developer and the IT Pro focus, in particular? I'm thinking about the community that you guys historically had? It was pretty strong, and it seems swag. It just seems activity levels, they slackened a bit. Just curious if that's a part of the strategy going forward? Thanks, guys.

Sudhakar Ramakrishna -- President and Chief Executive Officer

Most definitely. So the community has always been an incredibly important part of our strategy. And as you noted, IT Pros have been the foundation of this. I would say that that is continued to be the case and still on it.

But when I mentioned DevOps and SecOps, it's a recognition that the lines are sometimes blurred across those and their needs tend to be a little different, and we need to listen to every one of those communities. And so now, you will notice our track community that will also start reflecting that strategy as we move forward into 2022 and beyond.

Rob Oliver -- Baird -- Analyst

Great. Thanks again, guys.

Operator

The next question is from Erik Suppiger with JMP Securities. Your line is open.

Erik Suppiger -- JMP Securities -- Analyst

Yeah, thanks for taking the question. I just want to make sure I heard it correctly. The renewal rate in the Fed sector is still north of 80%, is that correct?

Sudhakar Ramakrishna -- President and Chief Executive Officer

That is correct. That is correct.

Erik Suppiger -- JMP Securities -- Analyst

OK. And then the license revenue declined about 26%. Do you think that's going to remain in that kind of decline range in maybe the 20% to 30% range as you continue to shift toward subscription? Is that what we can expect going forward?

Bart Kalsu -- Executive Vice President and Chief Financial Officer

No. I mean, Erik, as you start to build out your models, obviously, we expect 2021 to be the year that's most impacted by SUNBURST. So hopefully, you'll also start to see improvement in our license revenue and you won't see the same kind of year-over-year decline as we start to anniversary the SUNBURST incident. So you should start to see improvement there as it relates to our license sales.

And the impact on subscription, at this point, like I said, it's an 11% headwind on our total license revenue. And there will become a bigger number as we move into 2022, really more though in the second half with the observability product becomes more prevalent online.

Erik Suppiger -- JMP Securities -- Analyst

OK. Very good. Thank you.

Operator

The next question is from Kirk Materne with Evercore ISI. Your line is open.

Kirk Materne -- Evercore ISI -- Analyst

Yeah. Thanks very much for taking the quesiton. I guess to start, Sudhakar, you'll probably talk about this a little bit at the Analyst Day but does the shift to selling more subscription change the go-to-market model for you all in a material way? Is it just more of the incentives have to be shifted now? I'm just curious if sort of the structure of the sales model has had to be tweaked to sort of sell something that's a more sort of ongoing subscription of just -- versus more of a traditional perpetual license?

Sudhakar Ramakrishna -- President and Chief Executive Officer

I would classify it more as sales compensation models and sales enablement practices will evolve and change, not so much the sales structure per se. One area that we will look at it from a programmatic standpoint is how we engage with partners and the partner incentives and the partner motivations of doing that.

Kirk Materne -- Evercore ISI -- Analyst

That's helpful. And then, Bart, on the maintenance renewal side, when you lose a customer these days, are they moving off the technology? Have you -- they just suspended maintenance? I was just kind of curious if there's any opportunity to sort of have some of the maintenance that you've lost reattach over a period of time if they're just sort of running of SolarWinds without maintenance attached to it? Or is it more of a decision on their part to move technically to another vendor potentially?

Sudhakar Ramakrishna -- President and Chief Executive Officer

Yes. So I'll address that, Bart.

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Go ahead.

Sudhakar Ramakrishna -- President and Chief Executive Officer

So there had been cases of, let's say, customers who may have responded, let's say, to the fact that we had that incident by trying to go in different directions and some of them have actually come back to us even after possibly evaluating alternate solutions. On a programmatic basis, our customer retention team going back to that being our No. 1 priority in Q4 is exactly going back to some of some of those customers and figuring out ways to, call it, bring them back online either through, call it, reestablishment of maintenance or through, call it, reupping them through the entire portfolio. So that is a motion that we started and then I believe that we will have some traction around that.

We haven't fully characterized it.

Kirk Materne -- Evercore ISI -- Analyst

OK. And then just last one for me. Is there any real change in, say that the sales trajectory or maintenance renewal rates, if you look at it on a geographic basis, meaning, was the U.S. kind of hit harder and maybe EMEA and Asia Pac or is it pretty similar across the board when you think about this sort of just bookings momentum, renewal rates, etc.?

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Yeah. I mean, obviously, North America is -- just like on the license side, was a little lower, but not meaningful, to be honest with you, Kirk. And we were very encouraged by the fact that we've managed to get renewal rates up to 88% for the year. Obviously, well above what we projected at the start of the year.

And obviously, very pleased with performance of the Fed team as well to get the renewal rate with our federal customers above 80% as well.

Kirk Materne -- Evercore ISI -- Analyst

Sounds good. Thanks for taking the questions.

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Thanks, Kirk.

Operator

Our next question is from Erik Suppiger with JMP Securities. Your line is open.

Erik Suppiger -- JMP Securities -- Analyst

Yes. Thanks. So, just curious, has the -- have the supply chain issues been a factor for either you or for any of your customers, either in the build-out of the cloud capabilities or in terms of customers getting projects underway?

Sudhakar Ramakrishna -- President and Chief Executive Officer

Please ask me a follow-up if I don't answer the question to the point that you're raising. And so I'm -- might have to make sure that I address our intent of what you said. If your question is that whether the supply chain challenges or the supply chain issues that we had in our source code -- no? And that's not the issue. OK.

Is your question is about the broader industry supply chain issue, I would say no. That has not had any impact on us.

Erik Suppiger -- JMP Securities -- Analyst

OK. That's what I was asking. Is the broader supply chain, if that's made any difference to you, but it has not.

Sudhakar Ramakrishna -- President and Chief Executive Officer

Yes. No, I mean, we are almost entirely selling software and many of the customers either deployed in cloud infrastructure or virtual infrastructure, so they're not very dependent on physical parts for the most part.

Erik Suppiger -- JMP Securities -- Analyst

Very good. Thank you.

Operator

We have no further questions at this time. I'll turn the call back to the presenters.

Dave Hafner -- Head of Investor Relations

Great. Thanks, Chris, and thanks, everybody, who tuned in today. That concludes our third quarter earnings call. Have a good day.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Dave Hafner -- Head of Investor Relations

Sudhakar Ramakrishna -- President and Chief Executive Officer

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Unknown speaker

Sterling Auty -- JPMorgan Chase & Co. -- Analyst

Sanjit Singh -- Morgan Stanley -- Analyst

Rob Oliver -- Baird -- Analyst

Erik Suppiger -- JMP Securities -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

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