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Solarwinds Corporation (SWI) Q1 2021 Earnings Call Transcript

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SWI earnings call for the period ending March 31, 2021.

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Solarwinds Corporation (SWI -0.28%)
Q1 2021 Earnings Call
Apr 29, 2021, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, and thank you for standing by. Welcome to the SolarWinds first-quarter 2021 earnings call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Howard Ma, senior director of investor relations.

Please go ahead.

Howard Ma -- Senior Director of Investor Relations

Thank you, Summer. Good morning, everyone, and welcome to SolarWinds' first-quarter 2021 earnings call. With me today are Sudhakar Ramakrishna, our president and CEO; Bart Kalsu, our EVP and chief financial officer; and John Pagliuca, EVP and president of N-able. Following prepared remarks, we'll have a brief question-and-answer session.

This call is being simultaneously webcast on our Investor Relations website at 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 updates on the potential spin-off of our 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 potential spinoff of our N-able business. Additional information concerning these statements and the risks and uncertainties associated with them is highlighted in today's earnings release and in our filings with the SEC. Copies are available from the SEC or on our Investor Relations website. Furthermore, we will discuss various non-GAAP financial measures on today's call, unless otherwise specified.

When we refer to financial measures, we will be referring to the non-GAAP financial measures. 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 summary slide deck on the Investor Relations page of our website. And with that, I will now turn the call over to Sudhakar.

Sudhakar Ramakrishna -- President and Chief Executive Officer

Thank you, Howard. 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 and for their support of SolarWinds.

I've completed my first full quarter at SolarWinds, and I'm energized and inspired as I witnessed firsthand the tremendous dedication that our employees have to customer success, the competence, commitment and attitude displayed to execute on our Secure by Design initiative and to deliver demonstrable results, the commitment and trust our customers and partners place in us, something we deeply cherish and do not take for granted as we accelerate our journey to help them transform faster in an increasingly hybrid IT world. I continue to spend a lot of my time with our employees, customers and partners, whereas the conversations earlier in the quarter were largely about the cyber incident itself and what happened. Increasingly, the conversations are much more focused on what have we learned and how can we apply what we have learned to ensure the safety of our environment and those of our customers. In this regard, our Secure by Design initiatives are enabling us to have broader conversations with customers, thereby, bolstering our relevance to them even further.

I'll expand on this in a minute. With respect to the cyber incident, we are also coming to the end of our investigation and will continue to provide updates as we conclude them. I will now touch on a few financial and operational highlights in Q1. Our teams did an excellent job of maintaining focus on delivering customer success.

Our partners played a pivotal role as we executed the Orion Assistance Program in support of our customers. For the first quarter, we delivered revenues well above the high end of the range of our outlook with a total non-GAAP revenue ending the quarter at $257 million, representing year-over-year growth of 33%. First-quarter adjusted EBITDA was $106.5 million, representing an adjusted EBITDA margin of 41%, exceeding the high end of our outlook for the first quarter. Our Q1 core IT management maintenance renewal rate of 87% is higher than the low- to mid-80% renewal rates we noted we expected in 2021 when we discussed our full-year results in February.

We continue to focus on customer retention as a key priority and hope to grow back to our historical and best-in-class renewal rates of over 90%. Our largest customer renewed with us while also increasing their license count. We have also seen other customers, including those in the federal sector, expand their investments with SolarWinds in the first quarter. We see these wins as validation of our team's proactive and sustained efforts to deliver industry-leading solutions that are not only powerful and affordable but also secure.

Our N-able business, again, delivered double digit, 13% revenue growth in Q1, and we continue to expand our portfolio in support of our MSP partners and SME customers. Given the potential spin-off of this business, John Pagliuca will provide a business update on this call. We are accelerating our momentum in the database monitoring segment with the formation of a dedicated core team to help us capture what we believe is a large and growing market opportunity of over $6 billion. We were recognized by Gartner in the Magic Quadrant for application performance monitoring, another pillar of future growth potential for us alongside our database monitoring business.

We expanded our offerings in Q1 as we continue to evolve to a full stack observability company that helps accelerate the digital transformation needs of our customers via an integrated platform with automation, monitoring, alerting and remediation capabilities, leveraging AI/ML techniques on a unified cloud platform to support hybrid IT deployments. We expanded our management team with the appointment of Andrea Webb as our chief customer officer; Tim Brown as our chief information and security officer; and Rohini Kasturi as our chief product officer. Additionally, Jason Bliss assumed the role of chief administrative officer, integrating the corporate functions of HR, corporate development, legal and IT. In addition, we added key management members to the N-able business, including a chief technology and product officer, a general counsel, chief customer officer and chief people officer, as N-able prepares to operate on a stand-alone basis.

Now let me turn to an update on our Secure by Design initiatives. The recent cyber incident against SolarWinds, our widely used technology providers and our and their customers is a concerning new reality for the software industry. This represents the increasingly novel and sophisticated actions used by [Inaudible] space on the supply chain and infrastructure on which we all rely and illustrate the need for the industry and public sector to work together to share real-time information. SolarWinds is committed to sharing our learnings about this attack broadly given the common development practices in the industry and our belief that transparency and cooperation are our industry's best tools to help prevent and protect against future attacks.

And we see an opportunity to help the industry -- to help lead an industrywide effort that we believe will position SolarWinds as a model for secure software environment, development processes and products. In fact, this is increasingly the topic of discussion as I engage more closely with our customers and partners. Over the past three months, our IT, product and development teams have been committed to implementing a series of actions that are designed to further enhance the security of our environment and system against attacks, including adopting least privilege access mechanisms and addressing further potential risks associated with third-party application access. We also recognize that our security posture and procedures are dependent on the people at SolarWinds.

So we are investing in additional rigorous security training for our employees. Our initiatives continue to resonate well with customers and partners, and it is my goal to proliferate them as [Inaudible] as possible. We see these initiatives and investments as being consistent with our goal of being a best-in-class provider of powerful, affordable and secure solution. Now let me turn the call over to John to provide an update on the N-able business.


John Pagliuca -- Executive Vice President and President of N-able

Thank you, Sudhakar. I'll spend the next five minutes giving an update on the N-able business and first-quarter performance. I'm excited to announce that in Q1, we completed the rebrand of N-able across our platform solutions, new website and partner community sites. Also, on April 14, we hosted an Analyst Day for equity analysts.

I want to start by recapping some key points from our presentation. First, the market opportunity for N-able starts with a small and medium enterprise IT spending, which is over $1 trillion globally and growing. SMEs [Inaudible] as much IT complexity as larger enterprises, but IT management and security are not the core competencies of most SMEs. As a result, SMEs have increasingly turned to MSPs to be their trusted partner through their digital evolution.

And in turn, MSP is the technology that can be effectively -- can effectively address SME customer needs. Using our purpose-built software platform, MSPs are able to not just build successful service offerings but also play an increasingly important role in shaping SME IT spending decisions. We believe the market opportunity for our software solutions is approximately $23 billion and expected to nearly double by 2025. Second, why do we win? We win because we're architected for the MSP to enable them to effectively scale their businesses and are purpose-built across three pillars.

The first is our monitoring breadth and depth, which has always been a strength of both N-able and SolarWinds. Our MSP partners that live in our platform day in and day out rely on the centralized view and alerts we provide on hundreds of thousands of different end customer environments and devices. In Q1, we expanded our monitoring depth. We went GA with our Microsoft Intune integration, allowing MSP partners to perform Intune device management functions directly with the N-able platform.

We also extended our iOS device coverage to map workstations, adding remote access capabilities into additional types of network devices. Our second area of strength is our data protection and security solutions, which are fully cloud-based and seamlessly delivered via our RMM platform and give our MSP partners a truly layered approach to protecting their customers. In addition, because our platform gives our partners access into end customer environments, the security of our platform is extremely important. In light of the Secure by Design initiatives that Sudhakar has discussed in detail, we have and continue to implement end product security enhancements to our enabled products, such as multifactor authentication, single sign-on and SSH for network devices.

Third, we offer what we believe our best-in-class partner success resources that train our partners on how to improve technician efficiency, build stronger books of business and become better business operators. This helps drive retention and expansion on our platform. We look forward to hosting our global Empower event later this quarter, and the discussions we'll have with our partners on industry trends and how to solve the challenges they face. As we strive to become a stand-alone Rule of 50 company with a heavier lean toward growth from the potential spin-off transaction, I want to highlight the unique aspect of our growth model called partner enabled expansion.

We grow when we add new MSP partners and help our MSP partners grow. That's the fuel that propelled the model. [Inaudible] partner, we grow when the partner adds new technicians that use our sell-through solutions. More significantly, we grow when the partners add new SME customers and when those SMEs add employees and devices under management.

We grow again when our MSPs deliver additional solutions powered by our platform. This is the power of our sell-through model and also the biggest driver of our net retention rate. Through this partner-enabled activity, our partners essentially act as an extension of our sales force. Turning to N-able's Q1 performance.

We delivered a solid 13% total revenue growth and 15% subscription revenue growth, especially considering a couple of headwinds worth noting. First, after the cyber incident at the end of December, we slowed our demand generation and sales activity, which impacted new partner additions and expansions in January and February before returning to more normalized levels in March. Second, the continuing impact of COVID, which we began to experience during Q2 of last year, remains a modest year-over-year headwind, although the impact on our subscription revenue growth rates has continued to improve since the initial deceleration in Q2 of last year. Looking ahead, we're cautiously optimistic about improving conditions for the balance of 2021.

As we provided at our Analyst Day presentation, our outlook for N-able revenue growth was approximately 14% in Q2, an improvement over Q1 and 12% to 14% growth for the full year, assuming the spin occurs over the coming months. We are making investments for growth in R&D, international go-to-market and partner success that we believe will position us for growth acceleration as we exit 2021. We remain excited about the planned spin of N-able, which we're still targeting to complete over the coming months. With that, I'll turn it over to Bart to provide more details on our financial performance and outlook.

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Thanks, John, and thanks again to everyone joining us on today's call. Our first-quarter financial results reflect solid execution while demonstrating the resiliency and sustainability of our model. We had a much better quarter than anticipated and finished well above the high end of the range of our outlook for the first quarter with total non-GAAP revenue ending the quarter at $257 million, representing year-over-year growth of over 3%. Total N-able revenue was $83 million, representing growth of 13%.

John just talked about what is driving that piece of our business. And total -- or core IT management revenue was $174 million. Total license and maintenance revenue was $147.9 million in the first quarter, down 3.5% versus the prior year. Maintenance revenue was $123 million in the first quarter, up 6% versus the prior year.

We typically disclose the maintenance renewal rate for our perpetual license products on a trailing 12-month basis. Our Q1 trailing 12-month rate was 91%. However, given the heightened focus on smaller windows of performance since the cyber incident, we want to provide the in-quarter renewal rate for Q1, which was approximately 87%. This exceeded our expectations for renewal rates in the low- to mid-80% range throughout 2021, which we provided on our last earnings call.

In addition, we expect this renewal rate of 87% to increase by a few percentage points based on historical trends after factoring in renewals that expire bookings that occur post quarter end. For the first quarter, license revenue was $24.9 million, which represents a decline of approximately 33% as compared to the first quarter of 2020. The decline in license revenue is a result of the combination of the impact of the cyber incident, the continuing impact of the COVID-19 pandemic and our continued evolution to subscription sales for our on-premises products. Our on-premises subscription sales resulted in approximately 2-percentage-point headwind to our license revenue for the quarter.

That said, we believe that the first quarter should be the most negatively impacted as it relates to the year-over-year growth. We substantially halted our demand gen activities from December through the early parts of the first quarter as we focused our efforts on assisting customers. We believe this negatively impacted our new license bookings in the first quarter and in the early portion of the quarter in particular. We saw acceleration in our business as we move throughout the -- through the first quarter, and we are working to continue that trend as we move through the rest of the year.

Looking ahead, we expect to continue to have near-term headwinds on our business. Total ARR reached approximately $961 million as of March 31, reflecting year-over-year growth of 12%. Subscription ARR grew 13%, reaching $438 million at the end of the quarter. Moving to our subscription revenue.

First-quarter non-GAAP subscription revenue was $109.1 million, up 15% year over year, which was driven by N-able's 15% year-over-year subscription revenue growth, as well as solid performance in core IT management subscription revenue. Our land, expand and retain model has successfully driven sustained growth in our customer relationships. We finished the quarter -- we finished the first quarter of 2021 with 1,074 customers that have spent more than $100,000 with us in the last 12 months, which is a 16% improvement over the previous year and 17% more since year-end. We are continuing our efforts to build larger relationships with our enterprise customers.

We also had a solid quarter of non-GAAP profitability in the first quarter. First-quarter adjusted EBITDA was $106.5 million, representing an adjusted EBITDA margin of 41%, exceeding the high end of the outlook for the first quarter. Unlevered free cash flow for the first quarter totaled $51 million. Excluded from EBITDA and unlevered cash flow -- unlevered free cash flow are one-time costs of approximately $20 million, including $10 million of spin-off-related costs and $10 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 one-time and nonrecurring. They are separate and distinct from the $20 million to $25 million of Secure by Design initiatives, which are aimed at enhancing our IT security and supply chain process. These costs will be part of our recurring cost structure on a go-forward basis. We expect one-time cyber-related costs to fluctuate in future quarters but to be less in future periods than the amount incurred in the first quarter.

These one-time cyber costs are, however, difficult to predict. They not only include the significant costs of the forensic investigation efforts that we are expecting to conclude in the near future, but also costs associated with our ongoing litigation, government investigations and potential judgments or fines and related professional fees. We expect our insurance coverage to offset a portion of these expenses. We expect our one-time spend-related costs to subside following the completion of the spin-off, which we are targeting to complete in the coming months.

Net leverage at March 31 was 3.2 times our trailing 12-month adjusted EBITDA. With $374.4 million in cash at March 31, we believe we are well-positioned from a financial standpoint to continue to invest in the future growth of our business. I will now walk you through our outlook before turning it over to Sudhakar for some final thoughts. While ongoing customer renewals and pipeline growth are indicators of the health of our business, there is still enough uncertainty around the impact of the cyber incident on top of the continuing impact from the global pandemic that we feel is still too early predict a range of outcomes with the level of precision that we have provided in the past.

As such, we believe it is prudent to only provide second quarter of 2021 outlook for total revenue, adjusted EBITDA and earnings per share. For the second quarter of 2021, we expect total non-GAAP revenue to be in the range of $254 million to $258 million, representing year-over-year growth of 3% to 5%. Adjusted EBITDA for the second quarter is expected to be $102 million to $104 million, which implies an approximately 40% adjusted EBITDA margin. As a reminder, our adjusted EBITDA margin is being impacted by the incremental spending associated with the Secure by Design initiative that we began implementing in the first quarter, as well as the growth initiatives that John and the N-able team were executing in anticipation of the potential spin-off.

Non-GAAP fully diluted earnings per share is projected to be $0.21 per share, assuming an estimated 319.6 million fully diluted shares outstanding. And last, our outlook for the second quarter assumes a non-GAAP tax rate of 22%, and we expect to pay approximately $22 million in cash taxes during the second quarter of 2021. While we are not providing consolidated full-year outlook, I will say that we continue to expect license performance to improve versus Q1 as we move through the year in all regions. Based on what we've seen so far in the first quarter, we expect that maintenance renewal rates will be in the mid-80s for the rest of 2021, and we are targeting to return to historical performance in 2022 as we work with our customers to ensure their security and success and as we continue to further enhance our product portfolio.

Increasing the percentage of our recurring revenue has been a focus over the past five years, and recurring revenue is down 90% of our total revenue. We intend to continue to expand these subscription offerings of our on-premises products in 2021 and make that new subscription sales a priority with our sales team. And finally, with respect to our conversion of adjusted EBITDA to free cash flow. Our rate for the first quarter was well below our historical trends.

The conversion rate was negatively impacted by lower license and maintenance renewal bookings. The ongoing revenue mix shift to more subscription, as well as annual bonus payments, which are seasonally higher in the first quarter. We expect our conversion rate for the full year to be above 70% and grow to the low 80% range in 2022. 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 was evident as we delivered a strong Q1 performance and delivered results exceeding our outlook in both revenue and EBITDA. I'm confident that our continued focus on customer success will make us even more relevant as we evolve our platforms and serve the evolving hybrid IT needs of our customers. We expect to enable ITOps, DevOps and SecOps professionals to have integrated experiences across automation and configuration, monitoring, visibility, alerting and remediation.

These moves will further accelerate our progress toward a greater mix of subscription and recurring revenues. For the remainder of 2021, our focus will continue to be on executing on the initiatives that I outlined during our Q4 earnings call, focusing on customer retention and demonstrating ongoing progress in subscription, license and maintenance growth across all geographies and sectors. I'll conclude by again thanking our employees, partners and customers for their commitment to and support of SolarWinds. We hope to continue to demonstrate progress in customer retention, license and maintenance growth and accelerating our progress along with strategic and portfolio dimensions to support the growing needs of our customers.

John, Bart and I will now be happy to address your questions.

Howard Ma -- Senior Director of Investor Relations

Operator, we are ready for questions.

Questions & Answers:


[Operator instructions] Your first question comes from Matt Hedberg of RBC Capital Markets.

Matt Hedberg -- RBC Capital Markets -- Analyst

Hey, good morning, guys. Thanks for taking my questions. Sudhakar, I want to start with you. Now we do have some distance now between the breach and where we are today.

I wanted to dig into a little bit about both the renewal and the new business side. Obviously, 87% in quarter renewals were really nice to hear, given where expectations were coming into the year. But are you hearing any customers, both existing or potentially new customers, that are unwilling to look at SolarWinds products now following the breach? Just a bit more detail on that would be helpful.

Sudhakar Ramakrishna -- President and Chief Executive Officer

Sure, Matt. As I mentioned in my prepared remarks, I spent a lot of time with customers across geographies, as well as base sectors and sizes. The way I would describe it is that customers definitely want to understand what happened. And like I mentioned earlier in the quarter, a lot of the questions were around what happened with the security incident.

Now I would say there's a level of curiosity that customers appreciate that what happened from a security breach standpoint to us could happen not just to them but also see a lot more of the vendors coming out and speaking about breaches that are going on in their environment, including some very large vendors, as you know. So that doesn't become the main topic of discussion, and instead, it's about the portfolio, the value proposition and things like that. So I haven't seen examples of customers saying that they don't want to evaluate us. In fact, I would say that more and more of them are doing so.

And increasingly, what I find is that we are having broader conversations. So whereas previously, we may have had a discussion with, let's say, a networking engineer, now we are having discussions with the CIOs and the CSOs. So that gives us the opportunity to have more relevant and more strategic conversations with them.

Matt Hedberg -- RBC Capital Markets -- Analyst

Got it. That makes a lot of sense. Super helpful. And then Bart, you didn't provide a full-year outlook, but you did give us some detail on some incremental cyber costs.

Are there any other puts and takes that we should be thinking about? I guess I'm thinking specifically on the margin side as we move throughout this year.

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Yeah. Q1 EBITDA margin was a little over what we had originally expected, Matt. And so I think it came in close to like 41%. We're still -- we still have a lot of -- some headwinds that we're facing in the second quarter.

If you look back at our historical performance, margins tend to rise in the back half of the year. A lot of that is because of the increase in revenue in the second half of the year for us. We don't like to talk about seasonality, but Q3 and Q4 are typically better quarters for us from a license revenue standpoint. And if that's the case this year, then we would expect our margins to improve in the back half of the year as well.

Matt Hedberg -- RBC Capital Markets -- Analyst

Got it. Thanks a lot, guys.

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Thanks, Matt.


Your next question comes from Sterling Auty of J.P. Morgan.

Sterling Auty -- J.P. Morgan -- Analyst

Yeah. Thanks. Hi, guys. So the incremental costs that you're incurring for security operations, etc., you mentioned -- so the portion that you mentioned that will need to continue, which is understandable, I'm just curious, is there going to be leverage in that level of spend? Meaning is this a level that you will need to maintain? Or is there a variable component that will grow over time and maybe permanently impair margins to some degree?

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Yeah, Sterling. Really, the $20 million to $25 million, it's not going to scale with our revenue. It's fairly stagnant as far as what the costs are going to be on a go-forward basis. There's a few things that are like penetration testings and a few things like that that are in that $20 million to $25 million number that may increase slightly as our customer base increases, as our IT portfolio -- or as our IT footprint increases over time.

But it's not going to scale with the rest of our business.

Sterling Auty -- J.P. Morgan -- Analyst

Great. And then when you look at the improvement in new customer or new purchases, are there particular parts of the product line that are rebounding first? And is there anything within the product line that you're finding still lagging because of kind of hangovers from the breach?

Bart Kalsu -- Executive Vice President and Chief Financial Officer

From a product standpoint, Sterling, we saw the -- you wouldn't even see that is in our license revenue. And obviously, we talked about first quarter being our -- the first quarter being our toughest quarter in 2021. And really, it was pretty much across the board as far as what was down year over year. Obviously, the Orion product portfolio was the most scrutinized.

But from a product standpoint, it was really just across the board.

Sterling Auty -- J.P. Morgan -- Analyst

Got it. Thank you.


Your next question comes from Rob Oliver of Baird.

Rob Oliver -- Baird -- Analyst

Great. Thank you. Good morning, guys. Two questions.

First for Sudhakar or for Bart. Just a little bit on the slower license growth this quarter. Maintenance, obviously, it did pick up. Bart, you had said in the prepared remarks that you're making priority -- making subscription a priority for the sales team.

So just wondering, as you guys approach customers on renewals, I know the goal has not been to convert folks to subscription. But had there been some changes, Sudhakar, since maybe your arrival about the approach to subscription? And has that proved to be a bit of easing perhaps some of the barriers perhaps to renewal with some of your customers? And is that happening in core IT, as well as in the SaaS portfolio? And then I had one follow-up for John.

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Hey, Rob. First and foremost, as you said, for our existing customers, the maintenance renewal is more attractive from a financial standpoint. So we're not seeing a hard shift of our existing customer base to go from maintenance to subscription. The subscription sales of our on-premise products are all to new customers.

And that's still the case today. What we have done is starting with our database product -- portfolio of products. We're making that a priority from a subscription sales standpoint as we move harder into that market. Especially with the SentryOne acquisition, we're making that our initial on-premise subscription product that we're focusing most on.

And really, as we move into the second half of the year, I think that's one of the areas that Sudhakar may make a priority for us. Sudhakar?

Sudhakar Ramakrishna -- President and Chief Executive Officer

Absolutely. Just to reimpose on that point, we don't want to make unnatural moves, so to speak, on that front. And there are some very logical opportunities for us to translate more and more into subscription, as Bart mentioned, specifically with the database portfolio, and as we explore additional packaging options and integration options for our portfolio in the back half of the year. But most of those [Inaudible] indicators are a function of delivering more functionality and value to customers, and then in that context, also offering a greater leaning toward subscription, even as we train more of our sellers in that context.

We do have additional, call it, incentives for our sales teams to sell subscription, and that is something that we continue to amplify.

Rob Oliver -- Baird -- Analyst

OK. Great. That's really helpful. Thank you, guys.

And then, John, I had one follow-up for you. Just a couple of weeks here, we moved from the sell-side event that you guys did and really appreciate all the color. I know there were some puts and takes, at least from the analyst community, around kind of a profitability profile versus growth. It does sound, particularly given the TAM expansion here, I think, doubling through 2025, like there is meaningful growth opportunity along with, I think, as you guys said, desire to be a Rule of 50 company.

Can you -- just stepping back now, could you maybe just kind of frame how you're thinking about that, obviously, without providing any specifics you can't, but how you're thinking about that kind of growth investment profile and if there's any change in recent weeks as things, I know, start to get a little bit better and you're emerging from some of the COVID impact? Thanks.

John Pagliuca -- Executive Vice President and President of N-able

Yeah. Thanks, Rob. As I outlined in the prepared remarks, we're going to continue to increase investment across three areas of R&D, international sales and customer success. Each of those have a different return horizon.

And if you think about it, our international sales, we're investing there to WANs and larger MSPs in other parts of the world and also begin to plant our flag via some of our channel partners. I expect those to have a shorter return. I mean, we're actually starting to see progress in those geographies already. So that will have, I would say, the shorter return.

The second one around customer success. We continue to add resources and technology and processes to help our MSP partners grow their business and for them to add services, for them to add customers at a scalable way. That has a little bit more of a medium-term return because we have to help them grow, and as they grow, we grow. And then the last one around product.

As Sudhakar mentioned, we brought on our new -- our CTPO, Chief Technology and Product Officer. And he's looking at a bunch of different ways for us to improve the scalability of our platform, but also how to add services to help these MSPs at a little bit of a faster clip. So as you think about it from a product strategy point of view, we have two. One is we're going to continue to expand our service area on things that we can monitor, and we demonstrated that this quarter with the adding of the Intune integration.

And the second one is adding services for these MSPs to protect SMEs and to do their jobs more efficiently. That one takes a little bit more time because, of course, we have to develop and build them into our platform, make them MSP ready. And then that cohort service begins to add. So it's -- those are the three areas with, I'd say, slightly different return horizons for each of them.

Rob Oliver -- Baird -- Analyst

OK. Great. That's really good detail. Appreciate it, John.

Thank you guys very much.


Your next question comes from Kingsley Crane of Berenberg Capital Management.

Kingsley Crane -- Berenberg Capital Markets -- Analyst

Great. Thank you. It's great to see continued traction of the database management portion. Can you tell us a little bit more about the creation of this dedicated team? What other teams from within the business these team members may be coming from?

Sudhakar Ramakrishna -- President and Chief Executive Officer

Yeah. So I was very specific in calling it a core team. So the idea here is not so much to hive off from the functional teams. But we have organized functionally across the board because we want to create a lot more leverage, let's say, in product development and marketing and all the functions that we have.

However, what we've done is that being appointed a core team leader, Bob Potter, and in a sense, built a cross-functional virtual team that is focused essentially day to day on driving this business. So in many ways, we preserve the integrity of our functional teams, but also create the focus of a core team. So that's the idea behind this particular initiative. And this is a very scalable model from my experience.

Kingsley Crane -- Berenberg Capital Markets -- Analyst

OK. I appreciate that. That's very helpful. And then one for John.

That's very positive commentary on the growth drivers of N-able. Just wanted to touch on the growth outlook that you provided at the most recent Analyst Day. And so if we look at the results with 13% growth in Q1, with the month of pause demand generation, the 14% growth implied by the guidance for Q2 and then the 12% to 14% growth for the full year, I guess what should we make of the guidance and what it implies for the back half of the year, and if there's anything else that we should be considering in terms of this growth outlook?

John Pagliuca -- Executive Vice President and President of N-able

Yeah. So -- and just to remind the audience, so we guided Q2 $83.5 million to $84 million. That's the depth of 14%. And for the year, we guided $340 million to $344 million.

What we're expecting to see, a pretty consistent pickup and acceleration throughout the year, I would say, as we go through and you see it added on -- you get some of the returns from the investment that we continue to go through. So that's how we're thinking about it. We'll continue to invest in some of the products. We expect to hopefully have a couple of new offerings that come on that that add to the help for our MSPs that they can begin to add a little bit more in service, as we recently announced, a DNS filtering offering that will be integrated to our platform.

And those type of investments, you'll continue to see with our -- with the hope that will begin to get some return for both us and our MSPs.

Kingsley Crane -- Berenberg Capital Markets -- Analyst

OK. Thank you so much.


Your next question comes from Erik Suppiger of JMP Securities.

Erik Suppiger -- JMP Securities -- Analyst

Yeah. Thanks for taking my question. I think you had mentioned during your comments about one-time costs that there is some liability costs. What liabilities do you have for the breach? Or what are the judgments and fines that you're anticipating? And then secondly, can you comment about the performance of your observability products? I think those kind of slowly get started a year or so ago.

I'm just wondering how that's performing in the market these days.

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Hey, Erik, you were kind of fading out there at the end. But the first question, as it relates to the liabilities, as of March 31, we don't have anything recorded from a liability standpoint as it relates to the cyber incident. We just -- we were -- we're fairly early on in the process of the investigation. And as of right now, there's nothing that we've accrued at this point.

And I think your second question, if you could repeat that? I think it was something around our observability products?

Erik Suppiger -- JMP Securities -- Analyst

Yeah, the observability products were slow to start, I think, if you go back a year or so ago. And I'm just wondering if those are starting to pick up for you. Or how do you look at the competitive environment vis-a-vis like Datadog or New Relic or Dynatrace?

Bart Kalsu -- Executive Vice President and Chief Financial Officer

So yeah, on the subscription revenue side, for the core IT piece of our business, yeah, we're still evolving that product portfolio. We're still moving into that space. That is obviously going to be a priority for us in the back half of the year. That's one of the things that we're going to focus on.

So in 2020, the back half of 2020 and then into 2021, a lot of our focus has been on the spend of the N-able business. And the observability products, Erik, is something that we'll talk about in the second half of the year, probably something that Sudhakar and I will make a priority when we have our Analyst Day later this year as well.

Erik Suppiger -- JMP Securities -- Analyst

Very good. Thank you.

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Thanks, Erik.


Your next question comes from Sanjit Singh.

Melissa Dunn -- Morgan Stanley -- Analyst

Hi, guys. This is Melissa Dunn on for Sanjit from Morgan Stanley. So hoping to talk about the network monitoring. So how network monitoring is changing given the shift to cloud and how the Orion platform might need to modernize to address these use cases.

Sudhakar Ramakrishna -- President and Chief Executive Officer

Definitely. So there's a couple of facts that I'll highlight here. While there is definitely a shift to cloud in certain segments, a better way to think about the world is that the world is going to be hybrid for a very long period of time. That's step 1.

Step 2 is that even if you think about network monitoring on a premises basis, that is still a growth market, albeit not as fast-growing, let's say, a pure cloud-only market. So our strategy is to leverage our platform to be able to support the needs of both kinds of deployment. And the way the Orion platform itself is evolving is through the integrated platform that I mentioned, which will not only support monitoring as in network system, application and database monitoring, but also be the single platform that supports automation, monitoring, alerting and then remediation with our Service Desk products. So that's the evolution to think about, and that's what gives us a lot of confidence that we become more relevant to support the growing needs of our customers.

Melissa Dunn -- Morgan Stanley -- Analyst

OK. That's really helpful. And then just last one on my end. As we think about the cloud strategy going forward within the core IT management side of the business, are there specific areas of investment that you guys are focused on?

Sudhakar Ramakrishna -- President and Chief Executive Officer

A couple of areas that I mentioned, the database functionality, and then we spoke about some of the recognition we are getting in the APM space. Increasingly, the way to think about how we are focusing our investments is on that integrated platform with the integrated functionality across the four dimensions that I discussed. So instead of looking at product specific, we'll be looking at the broader needs of IT, DevOps and SecOps professionals.

Melissa Dunn -- Morgan Stanley -- Analyst

Got it. Thank you guys so much.


Your next question comes from Terry Tillman of Truist.

Terry Tillman -- Truist Securities -- Analyst

Yeah. Thanks for taking my questions. Maybe for Sudhakar or John. The idea of returning to demand generation activities, I'd be curious if we could focus a little bit more on that.

Because the reality is your sales cycles can move pretty quick, I believe, in both sides of the business, core IT management and N-able. So what are some of the early things you're seeing from the return to demand generation activity in terms of the rebuilding and pipeline, etc.? And how quickly could that get back to kind of normal cadence on demand and related volumes? And then I have a follow-up.

Sudhakar Ramakrishna -- President and Chief Executive Officer

Sure. First, I'll reiterate what Bart highlighted in his prepared comments, which is that our performance throughout the quarter on both sides of the business continue to improve through the quarter. So March was better than February, which was better than January. And that applies to the demand gen engine as well.

When the cyber incident hit us, it was pretty much all hands on deck from our side and our partners to essentially help our customers understand the impact. And as you know, the vast majority of our customers were not impacted, but even so, we try to touch as many customers as we could to make sure that they were safe and secure. So on our traditional demand and activities, we're not the main areas of focus. But then as we started stabilizing things in Q1, we turned our attention to demand gen.

And as you know, we have a fairly high-velocity demand gen engine. And the way I would describe it is that demand gen is normalizing, although we continue to focus on it from both an investment and activity standpoint to continue to help it grow because we have growth aspirations on both sides of the business.

Terry Tillman -- Truist Securities -- Analyst

Got it. And the second question -- and Bart, it was helpful providing that kind of in-quarter renewal rate of 87%. That's great to see. What I'd be curious, and I don't know who this question is for, the federal sector is a big part of your business.

And how has the resiliency been in that sector specifically versus the other industries? And what are you thinking going into the back half of the year where we do have the seasonal strength typically? Thank you.

Bart Kalsu -- Executive Vice President and Chief Financial Officer

So yeah. So the 87% that I provided, like I said, we expect that to actually improve a little bit more as we move through Q2. Terry, that includes our federal customers as well. So that's both our commercial and fed customers.

I will say that our fed business was slightly lower than the number that we're getting there for Q1. But we also talked about the fact that we had our biggest customer renewed in Q1. And we've talked about that deal in the past, and that's [Inaudible] customer as well. So we are seeing engagement with our fed customers.

We are having to work probably a little bit harder with that base, but we are renewing that customer base as well.

Sudhakar Ramakrishna -- President and Chief Executive Officer

And I have been talking to a number of customers, including [Inaudible] proportionate amount of my time on the selling customer base, given the size and the scope that we have with them. And many of the customers have certain things back on, have renewed, to Bob's point, and also continue to expand. We don't really break down specific renewal rates by segment, be it public sector or commercial. So continue to think about us in the blended context.

And we'll add commentary as we go.

Terry Tillman -- Truist Securities -- Analyst

Thank you.


And there are no further questions. I'll turn it back to you for closing remarks.

Sudhakar Ramakrishna -- President and Chief Executive Officer

I think we're done. Thank you, folks.


[Operator signoff]

Duration: 52 minutes

Call participants:

Howard Ma -- Senior Director of Investor Relations

Sudhakar Ramakrishna -- President and Chief Executive Officer

John Pagliuca -- Executive Vice President and President of N-able

Bart Kalsu -- Executive Vice President and Chief Financial Officer

Matt Hedberg -- RBC Capital Markets -- Analyst

Sterling Auty -- J.P. Morgan -- Analyst

Rob Oliver -- Baird -- Analyst

Kingsley Crane -- Berenberg Capital Markets -- Analyst

Erik Suppiger -- JMP Securities -- Analyst

Melissa Dunn -- Morgan Stanley -- Analyst

Terry Tillman -- Truist Securities -- Analyst

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