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SolarWinds, Inc. (NYSE:SWI)

2013 Analyst Day Conference

November 07, 2013 8:00 am ET


Kevin B. Thompson - Chief Executive Officer, President and Director

John Rizzo

Paul Strelzick - Executive Vice President of Worldwide Sales

Jason Ream - Chief Financial Officer and Executive Vice President of Finance


Keith Weiss - Morgan Stanley, Research Division

John S. DiFucci - JP Morgan Chase & Co, Research Division

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Robert Scott Zeller - Needham & Company, LLC, Research Division

Aaron Schwartz - Jefferies LLC, Research Division

Stewart Materne - Evercore Partners Inc., Research Division

Tim Klasell - Northland Capital Markets, Research Division

Kirk Materne

Scott Zeller

Kevin B. Thompson

All right. How are you doing this morning? See, I won't make you guys do it, but when I say that at SolarWinds, I make people get up and cheer. And if they don't get up and cheer, I keep saying until I do. I won't force you to do that this morning, but just so you know, next year, when I say that, you're supposed to yell, show a little emotion, a little energy because I will make you all do jumping jacks, that kind of stuff.

So I'm Kevin Thompson. I assume most of you guys know me. I'm CEO at SolarWinds. We got a lot of stuff. we're going to try and take you guys through today. We will try to find a few moments for you to take a break, maybe go to bathroom, maybe grab something to eat, but we want to make sure we try to get done by, we'll try to be done by around 1:00. I talk fast, so it doesn't mean I'll get done fast. It just means that I'll say a lot of stuff while I'm up here.

But we've got a good -- a really good bit of information to share with you guys today. I think some new things we think you'll find interesting and then you may find valuable. And I'm going to do my best not to fall off this little bitty stage. I may end up standing down there in a minute since it's not that big a room. So we will -- we'll go quickly, but we'll make sure to break several different times for questions to give you guys an opportunity to ask questions. There's all the legal steps and I'm now showing you the Safe Harbor, so we're all good.

Alright, so I think the first thing I want to start with is just to make to give a little bit of perspective of where we've come from and to as a company. So if you go back not that far, only 2 years ago, we had about 700 employees around the world. Today, we got a little over 1,200 employees all around the world in 13 offices. The key is not really the number of employees that we have, I think the important thing is that we believe that we've created a really strong global business over the last 2 years. We believe we've created the capacity to be able to grow our business, invest in our business and accomplishing a lot of things very quickly.

One of the real keys of our business model, and for those of you who've been following us for a long time, you've heard us talk a lot about velocity. And our business model is about velocity. Well, it's not just on the sales side, it's also in everything we do. It's velocity, which we create technologies. The speed of which we take a version 1 of a new product and get it to version 2 or version 3, so that it goes from being something that's pretty good to being a technology that's very stable, that starting to scale, that's solving both complex problems for smaller organizations, but also has the ability to solve complex problems for large organizations.

So we really had been focused on building a global business that will scale. A business that we believe can be a $1 billion software company and beyond and creating the processes and putting the processes in place to make that happen. It doesn't mean we're perfect. It doesn't mean that the things we create are always going to work as well as we like it to work the first time. But unlike a lot of organizations our size, we are very focused on creating repeatable scalable process. So it's just about 1,200 employees globally. It's about the ability that gives us to grow this business we think more quickly and much more economically, much more profitably than anyone else in the industry.

A little bit like -- though I didn't make the press with this, but that's because we did it from day 1. [indiscernible] I want my people working in an office. Our people all around the world work in office. We don't do the work-from-home thing. It works for some organizations, I don't think it works for ours. We need to be connected. We created a business model that requires every organization, every department, every function to be connected to one another or we can't be successful. The product management team and the finance them work together everyday. The sales team and the finance team, believe it or not, work together everyday.

And that's something we've done by design and it requires us to create connections and ways to communicate between our employees globally that have to be more robust, much stronger than what most of our peers in the industry have done. So that's really the important thing about the size we've gotten to, is we think it gives us a great platform from which to make that drive to $1 billion of revenue and beyond.

But also now, we're up to 29 products. 2 years ago, we had about 16 products. If you go back 4 years ago, we had 7 products. We've added a tremendous amount of technology over the last 3 years. That technology has absolutely added complexity to our business. We'll talk some about the complexities that's added to our business, the things we doing to make sure we manage that complexity and that we're able to do that and deliver consistent predictable growth. We've done a great job of delivering consistent, predictable, high profitability. We've done a great job of delivering growth over the last 5 years. Hasn't been quite as consistent as we'd like to have been in 2013, and we'll talk a lot today about what we're doing to make sure that as this business becomes larger, as it comes a little bit more complex, how we're making sure we stay tied to our roots, the things that make us unique, the things that allow us to win, the things that cause us to be competitive in the industry. But at the same thing, the things we're changing to make sure that as the business grows, will it be as predicable, as consistent as we've been historically.

We've got $312 million in trailing 12 months revenue. I think the real cool thing about all that is on $312 million in trailing 12 months revenue, we've generated $166 million in free cash flow. I would challenge you to find any of our peers of similar size, of similar growth rates over the last 3 years, who did 30% of $166 million in trailing 12 months cash flow, and especially on $312 million in trailing 12 months revenue. So we have real unique things about our model. We'll talk about it a little bit today, but not that much. We're assuming most of you understand it, is that we have a unique ability in the industry to deliver high growth, high profitability and a lot of cash flow at the same time.

One of the things that I am not big fan of is business models that tell you, "You know what, when I get to a certain size I'll be able to deliver profitability. When I get to a certain size, I'll be able to deliver cash flow." Well, here's the reality, it almost never happens. They keep pushing that date further and further and further out. They push the size that requires to get to critical mass, whatever that is, further and further and further out. And the real challenge for them is, their business models don't have leverage. Our business model has tremendous leverage that we decide when to allow that leverage to come through. To be frank, we have let more leverage come through over the last 9 months than we really wanted to let come through.

Our model has lots of leverage points. And in some cases, we just don't invest as quickly as we should to keep the profitability down, which is, I know, a pretty unique problem. Other people are worried about getting more profitable. I'm actually not worried about getting more profitable. Our challenge is we haven't been investing at a pace we should, given our profitability and our cash flow and the size of the market opportunity to really take advantage of that market opportunity.

It's because we're a return on investment-focused team. We're a team that really struggles to spend the dollar and not pretty quickly see $2 back. We're not a team who's willing to spend $4 to generate $1 of revenue. And that -- I get that a lot of people value that, that growth is really important. It is to us too, we're going to grow this business faster moving forward than we have in the first 9 months of 2013. But, at the same time, we're going to continue to do it profitably. We're going to continue to generate cash because that gives us flexibility.

So let's talk a little bit about the opportunity that we're chasing. I'm going to try to give you maybe a little different view of it than what we've given in the past. So maybe to start, I think we would all agree that we are in a period which the rate of change in IT, particularly in IT infrastructure for commercial enterprises, is greater than at any other time in history that we've ever seen. I don't know if on the consumer side, if the fastest it's ever been it's really fast. But on the commercial side, inside of businesses, the rate of change in IT is very rapid.

We believe that rate of change is creating opportunity for us. Some of that opportunity we can take advantage of right now, with the technologies we have today. Some of that opportunity is going to take us a little bit longer. We've got technologies we either need to build, or features and functions that we need to add to the products that we have already in order to take advantage of the opportunity. But we believe that we're well-positioned for that.

So let's talk a little bit about, to start, some of the change that's going on. Why I believe that change is creating opportunity. And as we go through the day, we'll talk about specifically some of the things we're going to do, either are doing or will do, to take advantage of the opportunity we believe is being created.

So let's start with our roots. We started out as a network management company. For those of you around, when we did the IPO back in 2009, that's all we had. Had a handful of network management products. We're growing very quickly. Believe we had the best set of the products of anyone else by our size and larger. We've added a lot of technology to that suite over the last 7 years since I've been here.

The interesting thing though is, today, managing networks is more difficult than it's ever been. So it's not getting easier, right? New technologies is not making the management of network performance easier. It's making that problem harder. And why is it making it harder? You have virtual and physical servers. You go back to even 2006, virtual service, yes, few people were talking about it. Some people were using it, but it wasn't a trend that's taken over the industry like it has today.

You've got SaaS. SaaS was a big at all back in 2006, 2007, 2008, 2009 even. And you got public cloud, private cloud, bring your own device. All of us have our favorite brand of phone that's connected to the network, whether that's an iPhone or BlackBerry. Wait, does anybody uses BlackBerry anymore? Anybody in the room still use BlackBerry? Oh boy, you guys are dinosaurs. We have 1 person in 1,203 people that still uses a BlackBerry at SolarWinds. And he actually just bought the newest one. I'm not sure why he did that. That wasn't like a statement on where the company's going, just one of those technology things.

But you got remote access, VoIP, video, wireless, all those things connected to the network and employees utilizing them, right? You think about it, even as a company, we're putting some stuff that we want our employees access out on YouTube, for them to access video. So now they're going from our network outside our network pulling videos down, looking at those videos and that is really all these changes, right? Are really complicating the job, the network engineers have to do.

So as we look at the historical set of products that we have, great technologies. We've had them for a long time. The company was founded in 1998. Some of these products were built in 1998. Most of them, since then, we only had 2 or 3 products when I got here, whenever that was, in 2006. So most of the technologies are newer than that, but those technologies, even though it was built in 1998, are still relevant. In fact, they're more relevant today, I believe, then they were in 1998. They're more element today than they were in 2006, 2007, 2008 because if the network doesn't deliver the level of performance the business needs, today's businesses, can't perform. Because the applications that they're using, they completely rely on businesses, they didn't rely on technology at all. 5 years ago, now require technology to work in order for them to even deliver any service to their customer or any product to the customer.

I'll give you an example. We've got a customer in Austin, Texas. It's a 50-person dental office. They bought 5 of our products to manage their internal network. If that network goes down, they can't see a single patient because everything they do from x-ray to what service they're delivering, to how they bill you is all tied to their applications, which is tied to their networks. So the moment their networks go down, they cease to be able to perform. So managing networks are become harder and more important than it's ever been before.

So as we look at that opportunity and we look at the set of products that we have that we believe are the best in the industry, the easiest to use, that can be used by the largest company and they can be used by the smallest company, and definitely the most affordable for what they do. For the complex problems they can solve, we believe that opportunity is bigger today than it was when we got here in 2006.

So we're focused on making sure that we're able to manage all this complexity for our customers. We're able to do that, but still remove most of that complexity from their view. And we're able to do that with a set of products that are fully integrated that allow them to solve 1 problem, so they just need to solve BYOD. Whats connected to my network? Where is it connected? What's it doing? Do I want it connected? And if I don't, I want to kick it off. We got a product that will do just that.

But at the same time, if you want to solve all of these problems, we've got a set of technologies that are connected together to allow you to solve all of those problems. So we believe this opportunity is going to continue to grow and it should be able to continue to be a growth area for our business.

On the server side, we entered in the -- entered the Server and Application Management business back in nearly 2011. So I haven't been in that part of the marketplace too long, but we've been growing very, very quickly. And even just during that period of time, the process of managing server performance has become much more complicated. You now have physical servers, virtual servers. It doesn't matter to the user whether it's physical or virtual, they have to make sure that the server performs, provides exact level of performance to the application so that application is available to that user whenever the application user needs it. You've got physical and virtual servers sitting in public clouds, you got them sitting in private clouds. You've got applications that are actually split between private clouds, public clouds on premise, off premise and all of that has to be managed effectively or the business doesn't run.

So the process the management, the job of managing of servers is more -- it's more important today than it's ever been. And it's more difficult than it's ever been. So as we look at that opportunity, as we look at the set of technologies that we have put together, both that we've built, as well as what we bought over the last 3 years, we believe we've assembled a set of technologies that allows us to take advantage of this dynamic that we see going on. And this is one where the rate change has been really rapid over the last couple of years. I think it's going to continue to be.

Your storage has been, it's an interesting space. We bought a storage management product back in 2010, is that right? Yes, 2010, I get my dates confused, sometime back in 2010. And at that point, management storage environment is difficult? Why was it difficult then? Because you got lots of different hardware platforms out there and very little standardization. And so the management technology that the storage vendors provided was very specific to their boxes. Because they really have a desire to manage everybody's boxes for them -- for you because -- why would you do that? Because that actually encourages you to deploy other vendor's technology.

Today, we've multiplied the difficulty of managing storage environment. When you add virtualization. When you add private cloud, public cloud, when you have all kinds of different -- you have dedicated storage, SAN, NAS, virtual storage. In many, many cases, you've got the exact same company deploying all of these different storage environments. In fact, when you look at the demands on performance, created by virtualization, created by applications and the level of performance users need, most users today, most companies today, IT guys are buying whatever storage device they need from whatever vendor provides that device to make sure they deliver a high level of performance. So you had a much more heterogeneous storage environment today than we've ever seen before.

If you go back 5 years ago, somebody says, "You know what, I'm just buying NetApp," or, "I'm just buying EMC." But today, they're going to buy whatever storage device in whatever form, whether that's dedicated, whether that's SAN, NAS. Whatever form is going to make sure they will deliver the level of performance they need to deliver to the user.

For the IT pro, that makes his job much harder than it's ever been before. So we see tremendous opportunity there.

And one of the other interesting thing is, as you get virtualization and storage combined and you put those 2 pieces of technology together, it makes it very difficult for any one management product to provide the visibility you need into that storage environment to understand where is the problem. You may know you have a problem if you just look at the storage box. But if you're not able to look from the application all the way to where the storage is, and look at the performance that the user is getting, you can't solve that problem. You know you've got an issue. You just have no idea what that issue is. And in some cases, you may not know you have an issue. It may look like, if you just look at the storage box, then everything is fine. But yet your user is experiencing degraded level of performance.

Well, how do you solve that problem? You have to be able to do that by connecting technologies. I think one of the things that you'll hear us talk about today is we have created a lot of technologies where we've created connection and we're creating more connection as we move forward because we believe it requires more than the ability to just look at one part of your infrastructure to make sure you're delivering the level of performance that the business demands.

Managing security is much more difficult than it's ever been before. You have so many devices connected to the network. So many people that are connecting the devices they own personally, as well as devices the organization owns to that network. You have a tremendous amount of regulation that all companies are having to comply with today around security, because every time we see someone -- like, I'm a customer Nationwide Insurance and I get a letter [indiscernible] 3 months ago. And you know what, all your personal data may have been compromised. Like isn't that awesome? All my personal data may have been compromised and we're sorry about that. Okay, that doesn't help much. And you'll -- here, you go do this and we'll pay for this thing to try to help you, but if you have a problem, let us know.

Well, the more times we see that, the more that's in the press, the more pressure that's putting on IT, and especially all these SaaS companies that are out there. They have so much data that is not their own. We use SaaS for a lot of things at SolarWinds. Our most critical business data sits in a cloud at some SaaS provider, or now they're a cloud provider, whatever. They were SaaS, now they're a cloud, it's the same by the way. It doesn't matter, just a new name. But we have data -- our most critical business data is not sitting inside our firewall. So as you see those issues arise, even if you've never had that issue, IT pros are being forced to deal we that. They're being forced to deal with things like HIPAA and all those regulations that require you to accumulate a tremendous amount of data and be able to show audit trails of what's going on in your environment.

So we've got a great little product called Log & Event Manager. And what it allows you to do is it allows you to capture all that data. It allows you to correlate that data in a way you can comply with all those regulatory rules that you have company with. It gives you the ability to not just know you had an intrusion, but to look at the data and say, okay, what happened? Where did it happen? When did it happen? What do I do to prevent it the next time?

So we believe that job has gotten much more difficult. It's going to get even more difficult as you look at what's happening in IT infrastructure as you move forward. A lot of you guys have been at the larger investment banks. I don't know if you still do this, but you all used to carry 2 devices, right? Your personal device and your BlackBerry. They're now letting you use 1 device. Oh now, you're carrying Keith S3 [ph]. So why? Because your IT guys said, you know what, no, that personal stuff is not connecting to my network because that creates a security issue. Organizations of our size, we don't do that. But most organizations in the world, don't do that. We let you connect your personal device because if we don't, the employees are going to revolt. So in order to create the productivity we need, we allow that, but that creates tremendous risk for us.

So as we continue to put things further and further away from the user, as we continue to have more and more devices connected into the network, as we continue to put things in public clouds, in private clouds, the job of managing securities, become much more difficult. But the issue is, if all you're doing is you're using some security product to try to solve that problem, it's not going to work. You had to have visibility. You'd have to have visibility from the network, to the application, to the end-user in order to really understand where the problems are, what's occurring, and how to unveil their really good job of preventing major issues.

Once again, we think we've created a set of technologies over the last 3 years that positions us to be able to do that better than almost anybody else in technology.

So the vision. And this is really a vision we've been building towards to for last 3 years. But our vision is, we want to manage performance of all things IT. And the important part of that is that's without regard to the location of the IT resource. So whether it's on premise, whether it's in a private cloud/internal data center, whether it's in a public clouds, whether you're using a combination of all 3, which is where most businesses will be over time, we need to be able to manage those IT resources and guarantee the level of performance that the business needs to support the business.

It also means, regardless of where the management resource needs to be located, as you look at how IT infrastructure is evolving, there are beginning to be situations -- and I used the word beginning because we're in very early stage, where the management resource has to be located outside the firewall in order to give visibility to performance that the IT pro needs to really understand what's going on with an application or what's going on with an area of their infrastructure.

So our vision, our goal, the thing we've been working toward for the last 3 years, what we'll continue to work towards is the ability to manage the performance of all things IT. We're not an infrastructure provider, we're a company that manages the performance of IT infrastructure. We're still focused on that, but we have to make sure we're able to manage the performance of those IT resources, wherever they are, however they need to be managed.

So let's talk a little bit about why traditional IT management doesn't meet the need. And this is a really cool graphic. In the kind of -- the idea of this graphic is, the only person that's happy today is the CIO. There's no one else in IT right now that's genuinely happy. Because IT pros, who are being forced to use the large heavy framework technologies from our larger older competitors, are not able to get their jobs done. It's why they come and download products from us every day. It's why we get deployed every single day by the dozens alongside technologies like HP OpenView and Tivoli, and CA, and Compuware, and BMC, all of those technologies. We get got deployed alongside them everyday to solve the problems the best framework technologies won't solve.

These IT pros are being forced to deliver an SLA, a level of performance to the business that they don't believe they can deliver with the technologies they've historically shortly been forced to use, so they out looking for, everyday, in the hundreds of thousands that are out on the web, working for solutions to problems they're not able to solve right now, with the technologies they have deployed, but some problems they must solve. If they don't solve those problems, then the business is going to cease to perform, application performance is going to slow down. We think business performance slows down. If they're using SaaS applications and the network slows, you can't get to that SaaS as the business slows.

I'll give you a great example. For us, we use a combination of and NetSuite internally. If our performance from salesforce slows, Paul's sales team immediately slows down. I guarantee you, at the moment it starts to just get a little bit slow, they send me email. And they say, "Kevin, can you do something?" Like, I don't know, I can't do anything. I didn't know how to -- I don't even know who to call. But the moment it slows, they call because it impacts to your ability to make 80, 100 calls a day. It impacts their ability to communicate with our customers and that get the at least deal a day we ask them to get every single day.

That's the trends that IT pros are faced with, as the technologies they have, have not kept with rate of change. The technologies they're using for the most part, do nothing really well, but they do a lot of stuff. If they bought that technology from a larger vendor, what they need is a set of technologies that for each individual problem they need to solve, solves that problem incredibly well. But then when you need to, did you connect that set of technologies and solve problems that span different areas of the IT infrastructure?

The only issue is there's a bunch of point products in the marketplace. Small competitors of ours that provide products that solve a very specific problem, and actually solve that problem relatively well. But here's the issue, so many problems today, and it's an increasing number of the problems that IT pros face, are not a problem with just 1 system. You can have a point product that's just looking at server performance. And it may say your servers are performing fine, but there's no issues with your servers at all. But if you've got virtual servers on that physical host, that -- then maybe you've got an issue that at a physical host level looks fine. At the individual view [ph], maybe it looks fine. But the ability to look at the application that's running made a database that's on that server look at the virtual machine that's running in addition to the physical server may point out. Well you know why you're having a problem? Even though you think everything is okay, because your point product says that it is, but your users are screaming because their applications aren't performing, it's because you have to be able to look at a connected set of problems.

So the point products in the marketplace that do an individual thing are becoming less and less relevant. Not because sometimes you only need to solve a very specific problem, we do that. Right? Our go-to-market model is, you have a problem, I want to solve just that problem today. I'm not going to force you to buy more technology than you need to buy, I'm only going to force to buy what you need, when you need it or we're going to give you the ability to add more technology very easily, very quickly, very affordably that's integrated than when you had these problems that are connected.

When you got your network impacting your server performance, you got database impacting your server performance or your virtual environment is doing something that's really degrading the level of performance that users are seeing, then we give you the ability to solve those connected problems or most of the kind of issues that you have to address. And that's the challenge of the point products that are in the marketplace today. They can't do that in today's connected world, in a world where the silos [ph] of our IT are beginning to converge. That's a real issue.

So the real key for us and why we believe we have consistently grown at a pace faster than the markets in which we compete, the reason we believe we can continue to grow at a pace much faster than the markets in which we compete, why we believe we can accelerate our growth as we move forward is we really do make it easy for IT pros. Over the last 3 years, we've assembled a set of technologies that we have built and bought and technologies that we had, that we've improved and we have begun to connect those technologies. So there's now not really an IT persona that we can't serve. So whether you're a security admin, a sysadmin, a database admin, a network admin or a storage admin, we provide solutions to solve problems you face every single day. And we provide those solutions in a way that is very different from our competitors. We provide solutions that solve the problem out-of-the-box. It's not one of those things where you go in and say, I have this great platform, what would like you like it to do? That's not the way we build technology, it's not how we sell technology. One of the key differentiators of our business model, why have there not been very many companies who have copied what we do, despite the fact that we've grown very fast at profit rates that no one's seen at our size in the industry? Because this isn't easy. You have to build technology that makes the business model work. You have to build technology that out-of-the-box solves the problem. In order to do that, you have to understand the IT pro. You have to understand what are the challenges they face everyday. You have to understand what are the things that the worry about when they get up in the morning, when they show up at work. You have to understand what things get their hair on fire and how do they want those problems solved. It's a very different way to think about building technology and deciding how that technology is architected, what the features and functions of that technology is going to be than that we've traditionally seen in IT. Our competitors just can't think that way, either they're too big, technologies are too old, too heavily customized or they just have business models that need multi-million dollar deals in order to make a dime of profit and they can't make 50% profit on an $8,800 [ph] deal, which we can, right? So they just can't change the way they go to market, which is why we've seen so little competitive response. And as we've expanded our product portfolio, we've increased by many times, the number of competitors we have in the marketplace. Almost every large enterprise software vendor we're competing with in some way. We're growing faster than all of those enterprise software vendors and they haven't been able to make a response. Even though they know we exist, we haven't gotten CA not too long ago. The new CEO of CA, when he came in, he put up a chart. Enemy #2 is us, which is awesome. I guess I got their attention. Three years ago, they said they didn't know who we were. I guess they know who we are now. But they're not going to be able to respond. They haven't been no response in the last 3 years because their technology simply won't allow them to. Because it is about solving problems for an individual IT pro, but giving them the ability to solve connected problems. It's about giving the sysadmin a tool that he loves to manage physical and virtual server performance, but then giving the database admin a tool that he loves, to better the performance of a cyclical database or historical databases, but at the same time, connecting those technologies, because when they have a problem that requires both of them, it's both of their environments that's creating the issue that they need to solve, we need to be able to do that. And we need to be able to do that in the same way we've been doing it for the last 7 years with individual problems just make it easy, make it -- download and install with an hour, make it immediately began to where are your problems, what are the issues you need to address and how do you need to address them. So that's the big difference in what we've created over the last 3 years, is the ability to solve individually still each of the problems these guys have everyday, but at the same time, we have only to connect these problems when they need them connected in order to deliver a level of performance to the business that they need to deliver.

So one of the keys about the way we think about technology is our products have to be easy to find. So our marketing model is all about put the technology in places where IT pros go. Make sure we know how an IT pro thinks. Where does he go on the web to communicate, to collaborate, to look for information? Where does he come? Where does he go on the web when he's searching for solutions or problems? What are the problems he's out looking to solve? And how they describe those problems? That may you make the product very easy to find when these IT pros are out looking for a way to solve a problem that the technology they have today won't allow them to solve. We have to make the technology incredibly easy to try. It's got to download and install within an hour. Not just install and stare at you and do nothing, It'll need to install and show you right then, hey, here's what's going on in your infrastructure, here's what you need to address, here's where the red flag's on. One the great advantages of our products is our user looks at our UI everyday. It's the first thing they look at in the morning, it's the second thing they look at in the morning. All day long, they're looking at our user interface, it's telling them what the problems are. So we focus a lot on the user interface. We make it very easy for a user to install it and configure our products. It has to be easy to buy. We have to make it affordable. Right? We break our products up a the way that you only have to buy the technology you need to solve the problem you have right now. And that you can do that at a price point that generally, an IT guy can approve without going to the Director of IT or VP of IT, right? Maybe they'll have to get their manager's approval if it's 10 K or 15 K, but it's an easy decision process for them.

Now, as our usage expands over time, they spend more and more money with us, lots of times, the VP of IT or CIO will find out, we're deployed inside an account. But, at that point, we are doing such a great job at such a low-cost that, that CIO is not going to block those sales at all and Jason will talk about in his remarks, some examples of how we grow inside of accounts because it's very different than the way our competitors do. I don't send a bunch of guys to sit at GE for the next 9 months trying convince them to deploy more and more of our technology. Instead, we really rely on this user who we've made successful become our sales guy inside the account.

Our products have to be easy to use and powerful and scalable at the same time. I used the example the 50-person dental office. Well, another example is the Veterans Administration in the United States. We manage their U.S. wide network. It's a very large U.S. wide network that we manage, larger than most commercial organizations. The exact same products that, that 50-person dental office using, the Veterans Administration is using. The exact same product. We don't build products for small businesses and products for large businesses. We build one set of technologies that's both easy to use, but it's powerful, scalable, solves complex problems. We take most of that complexity out of the view of the user. And then we have to make sure they're easy to maintain and affordable otherwise, a smaller company, a smaller customers can't even afford to buy them, they can't afford to maintain them and use them. If you need 10 guys to use the technology, then that's never going to work in most of the organizations that exist in the world today. Most of the organizations exist in the world today have less than 5 IT guys, right? The greatest volume of business in the world have less than 3 IT guys. Those 3 guys are responsible for managing the performance of every piece of the infrastructures. Servers, networks, databases, storage, applications, dealing with security, they need a set of tools that allow them to solve those problems easily and quickly and that they're able to maintain with very little effort.

So I'll talk about this a little bit. So one of the things that we're definitely seeing, I know you guys see it with all the companies you talk to, is that IT salaries are beginning to converge. This has always been true but more important than it's ever been before. Why does IT exist? IT exists to deliver applications. That's the only reason IT has really ever existed, is to deliver applications. But in today's world of complex applications deployed in lots of different ways, in lots of different locations, distant from the user, close to the user, sometimes both distance from the user and close to the user, it is getting -- the salaries are being forced to converge because no longer can you just look at one thing and make sure the business is getting what the business needs. In addition, when you look at application mobility, both mobility in a sense of I can use our applications internally from anywhere in the world I happen to be, from either my smartphone or I can do it from my laptop, from anywhere in the world, right? From an airplane, which is awesome by the way. We were on an airplane yesterday and Dave Hafner and I were on different planes because my assistant, Terry, will not let us travel on the same plane. So we're like 9 planes getting here yesterday and -- but we're -- might as well been sitting in the office next to him, right? Communicating all the way, the he's reaching into the network to grab things he needs to grab. That is creating convergence. Those types of changes in technology are creating convergence. So as these silos converge, as the silo of the guy who manages the server, the sysadmin, the DBA, the network engineer, the storage admin, the security guy, as those silos begin to converge, it requires a different view of how you solve problems. It requires you to have the ability to see really well, what's going on in the individual piece of the infrastructure, but at the same time, to understand where the connections are, what impact those connections can have on performance and when there are performance issues, to know where is it coming from. That is creating opportunities. It's going to create a tremendous amount of opportunity for us, we believe, as we move forward. We've already seen it create opportunity today and believe it will create even more opportunity in the future.

So the real key to all of this is we have to have the ability to deliver IT performance. To go back to vision, our vision is to manage performance of all things IT, both standalone, when you got an individual problem, I'm going to just look at your server for you. And also, in a connected way, when you require a view across pieces of the infrastructure in order to understand what's going on, we need to able to do that. Because if we can't do that, then we can't deliver the value that our customers need.

And so it's really important that as we build technology, and I guess one of the things that we've done well is to make sure that as we build and buy technology, that those technologies are connected, that it is very easy for a user to plug and play for them, to buy product #1 from us to manage the performance of their network. And then when they want or need to manage the performance of applications, they make them both by soil and sand [ph] from us and just plug it in, it's connected. When they need to manage their virtual servers, they can just plug that in, it's connected. So we have to make sure that we are thinking about building technology the way our customers and or users are being forced to manage the performance of the infrastructure. And in order to do that in a way that we believe our users will enjoy, love, continue to be thrilled about using our products, we got to make sure we're doing that through a common user experience. It does not mean 1 single get last [ph]. It can mean that and we have the ability to do that, but we don't need to do that. You can buy all of our individual technologies because they plug together, because they work together, because they've been designed to deliver the same level of user experience, which almost no enterprise software company ever gets to. And why do they never get to it? Because one, they didn't start out with that vision, we did. Two, their technology has been so heavily customized for Morgan Stanley, right? Who said, if you won't do this, I won't buy it. But if you do, I'll send $2 million with you. What they do, they do it. We don't do that. We don't customize our technology for anyone. And in order and because we don't, it doesn't meet the needs of an entire marketplace. So when you wrap around that, the fact that we've created a very large user community, if you guys have never been out to, which is our user community, you should go out and take a look because what you're going to see on that community is tens of thousands of IT pros every single day, communicating about the problems they're trying to solve, communicating about the issues they're facing. Communicating, which is great for us and how they're using our technologies to solve those problems and why they can't do that with anybody else's products. But it's the community that delivers the value of the IT pro because it allows them to interact with someone who's facing the same challenges they have every single day and can help them solve those problems more effectively. We also have to make sure that the customer experience when they deal with us, is different. We can't feel like every other enterprise software company. If we do, then we become every other enterprise software company and we've got no desire to be that. In my whole career, I haven't been anywhere normal yet, though I really ever intend to go anywhere normal. I've started in open source, trying to make money from free software then I went to the largest product software company in the world and then ended up here, so I've never been in a normal software company. We can't be that normal enterprise software company. We have to have several relationships. We have to deliver value to our users that goes well beyond what they've grown to expect from all the other interactions. And that's in every touch they have with us. You guys -- I know some of you guys have done this work. If you haven't, go do it. Call 100 IT guys you know, a bunch of them are going to be using our products. Ask them if they like them. What you will find is the overwhelming majority of our users love our products. Then ask them the same question about VMC, CA, IBM, HP, you pick, they're not going to give you same answer. So that's important. If we continue to do that well, then our users become the best marketers for us that we could ever hope to have and we don't have to pay them, right? Via word of mouth marketing in IT is the best way to market, but the only way it happens is if you solve the problem that the IT pro needs to have solved, you solve it the way they want it solved, you solve it in a relationship with them that they find enjoyable. And do we get this perfect everyday? No, we don't. But we try harder at it, I believe, than any other company in enterprise software and John will talk a little bit in his remarks about how we're going to double down on that as we move forward because we think it can deliver tremendous value to our business.

So this is a vision, right, that we've been building to for the last 3 years. It hasn't been a bunch of fragmented pieces of technology that we've been adding. Yes, we've added a bunch of technology that we bought and built, but all of that technology has been added with a very specific goal in mind, the very specific goal of we need to have the ability to manage the performance of all things IT, regardless of where they're located, and regardless of where the management technology itself needs to be located. And when you look at the complexity of the environments that we're dealing with, you look at the rate of change in IT, every individual area of technology where we compete, where we have products, where we solve problems, we believe is going to create tremendous growth opportunities for us. And then when you connect it all together, that multiplies the growth opportunity.

So I show this -- I'm not great with slides, they put a lot of builds in here and I almost -- they were really worried I'd forget to build everything. I've done pretty good so far. I've actually been hitting the builds. Jason was going to have an extra clicker just in case I got way ahead of the slides because sometime I do that, but I'm doing pretty good today because the screen's in front of me. So I'll talk about a lot of this, but it is about the integration of all of this which is what allows us to be successful.

We have a acquired a lot of products, but at the same point, we've built a lot of technology and the moment we buy technology, we start to integrate it. We don't have that issue, that challenge that most companies have, is their architecture doesn't allow their technologies to be integrated. While we don't sell a solution and we don't do solution selling, as I've been talking about for the last, how long have I been talking, we need to be able to solve connected problems. You can only solve connected problems well with technologies that speak with one another, the technologies that work in very much, a similar fashion. So our products depending on what they are, some of them are fully integrated, some of them are lightly integrated. It really depends on the problem. We believe those products are trying to solve together. And it is about building a community of IT pros who are enthusiastic about what we do. A community of IT pros who are willing to tell other IT pros how great our technologies are. When Paul's sales team gets a request for a reference, unlike every other company you talk to, we don't give them the same 10 companies that love them because everybody else hates them. We say go to flat [ph] and just look at what they say because we're that confident that we're delivering that much value to our users and that they are thrilled with the experience that they're having. There's almost no other enterprise software company that's willing to do that, why? Because users, for the most part, hate them, right? They hate the technology, they're being forced to use it, it's heavy, it's hard, they don't feel like the vendor cares at all. We have worked very hard to create a community and make sure that IT pro community believes that we care, believes that we listen and when they tell us they need stuff, then we deliver what they need.

One of areas of investment that Jason will talk about is we are going to accelerate the pace in which we're listening to those IT pros. We're going to accelerate the pace in which we're responding to some of the requests that they're making of us to add things to our technology to solve new problems they have or to maybe change how the technology works in order for it to -- for them to do their jobs more easily, more quickly. So we're going to increase the investment in that because we know that investment will pay large dividends in the future. And it's about building the back end processes to manage all of this because all of this has to be done at a very high volume and a lot of velocity. We do a tremendous number of transactions every single day. Our goal is for everyone of our sales reps around the world to close a deal a day.

When you have a business model that moves that fast, if you don't create the automation to manage that business both on the sales, marketing, product side, if you don't great processes defined and repeatable, then you start to fail. We've done a good job on that, it's why we had north of 50% operating margins because that's been a focus since day 1. It makes all of this work together.

So what does all that mean in terms of the market opportunity we believe we've created? So we believe and we look at the market opportunity a little different than some. So this is not a Gartner number or an IDC number, the reason for that is Gartner and IDC only look at the spending of the largest commercial organizations in the world. They miss the great bulk of the marketplace. They completely missed 11.6 million small businesses in the world, most of which have less than 50 employees, all of which need technologies to manage the performance of their infrastructure. Going back to that 50-person dental office example, maybe 6 years ago or 7 years ago, that company didn't need performance management technology, they absolutely do need that today. So when we build this market opportunity, which we believe is $73 billion as they -- with the technologies that we have today, and it's got a recurring annual maintenance opportunity of about $21.9 billion. The way to got to that is we looked at our average price points for the size of these companies, with our average available discount built in. So this is not one of those hands you can never get at, this is one of those hands that's absolutely tied to our products, our price point, the way we go to market. A very neat thing about the way we go to market is we have the ability to reach companies of all sizes. Every day, we close deals with companies with less than 50 employees and everyday, we're closing a deal with someone who's got 10,000 employees. Because our go-to-market model, our technology model allows us to do that. And what we've been able to do, as we've brought this vision together over the last 3 years of building a set of technologies that allows us to manage performance of all things IT, to solve individual problems, but also solve connected problems as we've been able to significantly increase that market opportunity from $65 billion last year to $73 billion this year. If you go 2 years ago, that market opportunity was about $54 billion. So the things we're doing, the things we will continue to do are focused on increasing the size of the opportunity we're chasing and making sure we can more effectively get at that opportunity. So that's why when you guys ask, is the market opportunity saturated? I always say, not even close, we've barely gotten it started. Does that mean we always grow as fast as we like? Apparently not, because I haven't grown as fast as I'd like in 2013. But it doesn't mean the market opportunity is not there. What it means is, we haven't done all the things we needed to do to make sure we're attacking that market opportunity in a successful way, at a pace we want to be successful. This is why I continue to say we continue to be committed as a team, we're going to build a $1 billion software company and beyond, right? I'm confident in our ability to get there and beyond there. I only say $1 billion because as Paul has taught me many times, you have to get to 1 to get to 2. So I say $1 billion not because we're stopping at $1 billion because I know we can get this business to $1 billion and then we'll go and get it beyond. And the only question is how fast can we get it there?

So as we move forward, what are we focused on? We've got to focus on executing on the strategy. We got to build on our strengths. We have great products. We have products that solve the problems IT pros need solved, those individual problems they need to solve, better than anyone else in the industry. At the same time, we create connections between those products. They're going to allow IT pros to respond and they're allowing them to respond today to an IT infrastructure world that is converging, to an IT infrastructure world where they have to be able to have visibility in the database server, virtual server, network, all at the same time in application in order to deliver the level of performance that the business has to have. And if the business doesn't get that performance, business performance will absolutely suffer. We have to make sure that we continue to be committed to a plug-and-play ecosystem. We're not ever going to be a solution selling company. We're never going to have outside sales guys. We're never going to have consultants who go and customize technology. So we have to make sure that out-of-the-box, our products solve the problems they're designed to solve. We have to make sure we understand the problems. We have to make sure we understand how the IT pros wants to have their problems solved. We have to make sure it's incredibly easy to buy 1 product today to solve the problem you have right now and you come back 3 weeks from now or 3 months from now and plug another product in incredibly easily and solve the next problem that you have or solve a set of connected problems that you have. We have to continue to build the brand. We have a great brand globally. We're the second most recognized brand in network management. We have not spent much money on branding over the years. We need to do a little more work on that as our -- as we've gone from 4 products to 16 products, to 29 products, we have to do a better job of creating awareness of the relevance of the branch, you'll see us do that more. You already seen us doing more now if you've been watching the last 4 to 5 months. But we've got to continue to build the brand and not just making people aware, oh yes, SolarWinds, they do this, but build a brand that IT pros trust, build a brand that IT pros have an emotional connection to. Today, we've done a good on that, especially on the network management side. It's why I challenge you, go and call all your favorite IT guys and they're going to tell most of you, log back into your shop, ask your shop if they use our products. Because in most cases, when I'm out running around and I actually get to talk to an IT guy in one of the investment houses I'm in, most of the time, they're using our products, product buyers. Because you have small IT teams but huge demands on performance and you folks are not the most patient people in the universe. So I'm sure when your technology slows, you're yelling quick. So those guys are looking for technology that allows them to get their jobs done. So we have to make the brand emotional and then we have to make sure they have a great experience with the product, but that they also have a great experience with our company. And we've got to leverage the model. We have worked very hard over the last 7 years to build a business model that's unique in its scale. No one believed 5 years ago we'd ever get to the size we are, selling from the inside, using the web in an enterprise software world. What I'd tell you today, I think the outside sales model if it's not already dead, it is dying. And if you're still using it, you will run into a wall at some point, you will not be able to climb over. We've seen it happen again and again. You can only go see so many customers. You can go so many -- you're going to see so many customers who can't write a check big enough to actually cover the cost of the trip, right, or the cost of the multiple trips. So we've shown with the selling from the inside model, we can close deals of all sizes. We close deals everyday of $300 and we don't everyday do this, but we closed deals -- a number of deals over the years north of $300,000, north of $1 million, north of $2 million, all in the same engagement model with the customer. Customer downloads the technology, evaluates the technology, decides it solves the problems they believe that it will solve and then we'd help them buy it. We help them -- we want to make sure that they buy what they need to solve the problem that they have and then we've got to remain committed to a marketing model that is awesome in its ability to have one to many communications. I usually just say the web, now there are so many things that are kind of web-related, social media all that, is it the web? Yes, it's the web and not in the traditional sense but using all the forms of communication that are available to us, all the forms of communication that allow us to reach hundreds of thousands of users with one message, all the forms of communication allows us to capture the attention of IT pros, whoever they happen to be, having a conversation about problems they need to solve a little relevant, we have to continue to leverage those. We have to be much better tomorrow than we are today at that. I still believe we're the best company in enterprise software in using those forms of communication of you're using the web to reach our potential buyer. But as I said before, that's a very low bar. You can roll over that bar because most enterprise software companies' idea of a website is a content site which if you want to come and read about the company, yes, it's there. They don't use it to drive the growth of their business, we do. We have to think to a lot more like B2C companies, like social media companies in reaching our potential buyer, so that's what we're trying to do.

All right, how am I doing Dave? Good? All right. So we'll take -- so I'll take some questions and I've got a little bit more and then we're going to let somebody else talk. Wait for the mic so people in the webcast can hear.

Question-and-Answer Session

Unknown Analyst

If we look at sort of the product strategy over the years, you went through a big effort to sort of unbundle everything from Orion a couple of years ago. Maintaining that point model, it sounds like that you're talking now about connecting more of the products I guess, behind-the-scenes, maybe. How do you ensure that you still get the volume on a point product sales and not really hold up the sales process that your customers think about, tying these things back to get on the back-end?

Kevin B. Thompson

Yes, it's a good question. It's really all about -- it's about what the products do and how we market and how we sell, which is we know when a user touches us. And keep in mind, we don't talk to a customer until they download one of our products for evaluation. So they're downloading an individual product, they're not downloading a solution. Each of these products are individual, they're standalone, but they're connected at the same time. So they're downloading an individual product to solve an individual problem. And we are going to sell them the product to solve the problem that they have. We're going to listen to them when they tell us, here's the problem I'm trying to solve, which is why our product solves it. In some cases, one of Paul's guys may say you know what? You need this and that but our average number of products per transaction has been growing a little bit but not by leaps and bounds. We're not pushing it to just grow. We want to make sure we continue to do what we've always done, which is build technology to solves just the problem you have now, solves it very, very well at a very affordable price and we don't make you but more than that. But we need to do a better and better job over time on making sure that when you need to buy more, that it's easy for you to do that as those technologies work together. It's not easy. On the architecture side, we worked really hard to make sure that as we unbundle -- but that even if when we unbundle, remember they still roll it on the same Orion platform. We just broke them apart so you don't have to buy the platform in order to buy the product. So as we've created the architecture of our technologies, we make sure that we're in no way dependent on releasing the foundation in order to release every product individually at any point in time. We're going to release the foundation that a lot of those products sit on at any point in time, separate from the release of the product. That's a hard architecture problem to solve. When you've solved it, we stay -- we have to remain committed to it. So the reason that it doesn't change the way we sell is because we are solving individual problems. What it does is allow us to get at that installed base opportunity. Paul will talk about that a lot in detail in his remarks, a lot more effectively than we did in the past because the technologies are connected in a way that the user can see lots of things that they need to see, problems they need to solve and we're going to make it very easy for them to just plug it in and go.

Unknown Analyst

So just following up on that, the benefit of connectivity from kind of the grassroots level. Can you maybe walk through, help us understand how you would troubleshoot a problem? Some end-users having some latency and they are using SolarWinds' interconnected products. So you have a bunch of admins now who are doing a fire drill versus if they run an IT management framework. How will the process be different in your connected world?

Kevin B. Thompson

So the biggest difference, right, and they way we've been building technology for the last 3 years. So this is not a change, we've been building technology like this for the last 3 years. Our products have been evolving this way for the last 3 or 4 years. But the difference is that we are still building individual products and solve a very specific problem very well. But then we're just making sure that those products have a connection point. I will give an example. So let's say your network is running slow and so you're using SolarWinds NPM, you're looking at the performance of the network and you can see that your network's not performing well, you can see that your bandwidth is getting saturated in a way that it typically not -- you haven't seen it saturate before, it's not normal. So then you can use Solarwinds' NTA to say where is that problem occurring? Where is all that bandwidth usage coming from? And so SolarWinds NTA will allow you to actually see where is all that bandwidth usage coming from. And then we got a product called SolarWinds UDT, User Device Tracker, which will then allow you to not just know where that bandwidth is being utilized from, but to know exactly who's using it, right, or what group of users is using it. So then as an IT guy, you can go and solve that problem.

With just NPM, it's going to tell you've got a bandwidth issue, right? That your bandwidth is saturated, that it's coming and it's going in spikes and that's impacting performance. Without the other 2 products you really can't know what problem to solve. But a lot of organization just want to know they've got a bandwidth problem. And then they'll say, okay, I've got bandwidth problem, I'll deal with that. Other organizations are going to want to know how do I solve that problems. The difference is building technologies to solve a very specific problem. And solve that problem incredibly well and then just making sure that you connect them to provide visibility, to give the user the ability to solve a problem that spans different areas of infrastructure. The big different in that and all the framework guys is, the framework guys build this massive framework with the intent that it's going to do everything. They don't build it at a byproduct level. They build it at a framework level. And so the individual problems they're trying to solve, they don't solve well at all, and they force you to buy it all. We never want to force you to buy it all. Our average customer owns less than 3 products still today. Now, we've added a bunch of technologies, so we've added a bunch of customers, so while that's been growing, the numbers relatively flat, but only those less than 3 products today. So that is -- tells you that we're still doing a great job at solving very individual problems, and we're gradually increasing the number of products each of our customers own because as they have additional problems, they're seeing how easy it is to use technology from SolarWinds to solve that problem, and it gives themselves more visibility across their infrastructure.

Keith Weiss - Morgan Stanley, Research Division

This is Keith Weiss from Morgan Stanley. Well, I definitely agree with you having seen the large vendors emulate your business model to a great degree. I think we had seen a lot of smaller vendors, particularly start-ups in IPOs, emulate the low ASP, high transaction values, [indiscernible] value type business model, and you've been on the board with some of them, helping them do that emulation. So from a competitive standpoint on a go forward basis, how do you think about those competitors emerging kind of from the bottom? How do you think about defensibility of your business model against more vendors trying to emulate that from, again, from the bottom, and the effectiveness of your marketing strategies with more people trying to emulate that same type of online marketing dynamic?

Kevin B. Thompson

Yes. So when you look at what's going on in the industry, you have had a number of organizations trying to emulate different pieces of our business model. So whether that's online marketing, whether that's technologies relatively easy to try and buy, whether that's trying to go with kind of a primarily inside-sales-based model, there are a number of companies that are trying or tried to do that. Not that many in our space, right? There's companies kind of around where we play today. In subspaces, we'll talk about later that we are interested in that have done a pretty good job in various specific areas of the market place. But in Network Management, Server Management, Storage Management, Database Management, in those areas, there's not many vendors who have been able to do it successfully. Why? Lots of different reasons. One, brand; one, capital. One, they think they understand what we do. And we meet with lots of these guys because we're happy to share part of what we do, and we're happy to listen to what you do, if you're telling us what you do. And what we find is there's just so much of what we do that they miss. Like 30% to 40% of what we do is visible. 60% or 70% of what would we do is really not visible. It's the things we do below the surface that make this business model work. So if I look at what's happening in the market place, I hope that some small vendors really get it right. That's why we're willing to meet with people all the time. I meet with people. Jason meets with other companies and shares some of the experiences that we've had. But we -- so we actually hope that there's to be an ecosystem of companies that are going to market in a very similar way the way we do because it gives us an opportunity to partner with them where in some cases like Confio and N-able allows us to acquire them because both those businesses studied us for years. Both those businesses, even though they do different things than we do and N-able is a little different market, they tried to do it very much the way we did. So it gives us an opportunity to add those businesses to the portfolio. Also, as you look at the way we look at market, I never need to be first. I don't need first mover advantage to any market. In fact, I don't want to be first to any market. Because we want to go in a market to the point in time that those markets are very well defined, when the problems are defined, the user knows what the problems they want to solve, they know that it has to be solved. I don't want to do evangelical selling because evangelical selling and marketing is not what works in our model. So I actually hope some of those companies create market demand, they create awareness. And I was like, I love right now what Splunk is doing. Because what Splunk is doing is showing people the value of using log data to solve a lot of different problems. The also great thing about what Splunk is doing is that the way they're going at it, they're creating awareness in the mid-market, they're creating awareness of that value in the small business, but their business model and their technology model will not allow them to play there. They don't -- and so its going to leave a big gap, but they spend a lot of marketing money, a lot of R&D money, that we are starting to take advantage of today. We think we'll take more advantage of in the future. So I think it creates new opportunity when we have competition. We like competition. It creates opportunity when companies try to emulate what we've done. And it really helps if they're emulating that in areas that are interesting to us, when the problems aren't that well defined yet. So they get defined, the entire market starts to understand those problems, and then we can go and exploit that.

I think we need to go into the next station. Dave is giving me the move along. So if we get done at the end we'll take a lot more questions.

Kevin B. Thompson

All right. So let's talk about just doing a quick refresher. We did talk about some of the models just now. Quick refresher on the model. So the foundation of who we are has not changed, will not change. We're a commoditor -- commoditizer and disrupter of existing well-defined markets. Like I just mention the key. We build products that are powerful, easy-to-use and affordable. We sell problems that are well known but just aren't well-solved. And we want problems that are well known. We want the user to know they have to solve the problem. That if they don't solve the problem, business performance is going to suffer. I don't want to have to convince you of that. I want someone else to do the convincing. I let you spend all your money -- kind of like drug company, right? The generic guys love the guys who build the drug initially. They spend all the money on R&D, they spend all the money on all the failed drugs, and then they only take a bunch of money for a little while, but then the generic guys come in and make a ton of money at a high level of profit over from kind of Day 1. We want all that initial work to get done, and then we're going to go in and solve the problem better. And we're going to do it at a price point that those vendors can't afford to charge either because their technology is too complicated, because they went at the problem the wrong way, meaning, outside sales consults, all that stuff, or because they incurred so much cost in solving the problem initially, they can't afford the price at those levels. As I said before, we don't need first-mover advantage. We don't want first-mover advantage. First-mover advantage is expensive. And in the areas of technology we're in, we don't need that to be successful. We're not going to get locked out, we believe, of any account simply because you're using someone else's technology, because by the thousands, every quarter, we get deployed inside of organizations that are using somebody else's technology because our technology solves the problem more effectively. By the hundreds or more, every single quarter. After someone's been using our technology 3 or 4 or 5 years, they will kick out completely their large incumbent vendor because they bought so much technology from us over time that now we're managing their entire infrastructure. Jason will give you some of those examples when he goes through his comments.

We're primarily a web-based marketing model. The great thing about the web and about using social media and all those great new forms of communication is they transcend all boundaries. Boundaries of company size, boundaries of geography, boundaries of vertical industry. So it's the best way to communicate with hundreds of thousands, millions of IT pros around the world at the same time. We sell from the inside. It's much more than inside sales. So if people think we're just telesales, you've got it wrong. We're way more than telesales. Yes, we sell over the phone, but we have created a set of processes that allows us to close very complex transactions for very large organizations and very simple transactions for very small organizations with the same set of reps around the globe, with the same set of processes around the globe. No else has replicated that yet. It's one of the reasons no one else has figured out exactly how to do what we do, why they almost always add 5 outside sales guys here or 7 outside sales guys there. Saying no, no. It's just a few outside sales guys. Just a few outside sales guys is just like a few bunnies. They're going to be more and more and more of them. And pretty soon they've overtaken everything else. They've eaten all the grass and there's nothing left. Now that's what happens when you add the first few outside sales guys. You like that one, Paul? That was a good one, wasn't it? Yes. And then we have to make sure we continue to be able to serve the entire market. From the smallest business on that chart, 11.6 million small businesses around the world, to the Global 2000 with the same set of technologies. It's what allows us to have the leverage in our model that we have. It's what allows us to grow with our customers from 1 product to 30 products or to 29 products over time.

Benefits of our model? Our products show value out-of-the-box. We talked about that already. If they don't, the IT pro is going to lose interest because his hair is on fire. He's got a problem he has to solve, but something else will start burning any minute. So you have to capture his attention at the point of time he's focused on that problem. And in order to do that, the products have to show value out-of-the-box. The architecture of the technologies makes everything else work. If the products were built the way they are, our sales and marketing engine will not work. We have to make sure we've got a low-cost, high-efficiency, high-quality product development model. It goes back to that 1,203 employees around the world. We've built a global engineering model. We believe it's the best in the industry. We build technology at 10% to 11% of revenue. We've done that consistently for a long time. We've gone from 12 products to 29 products, and we still build it at the same percentage of revenue, and we still release 2 new versions of almost all of our products every 12 months. Not bug fix, new features, new functions, solving problems our customers need solved, or adding solutions to problems that are new because of things like software-defined networking or public cloud or private cloud or whatever, virtual desktop, whatever you want to call it, whatever those issues are, we're going to add those solutions quickly. We have a strong connection with end users. Why have we made very few product mistakes over the years? Because when my product guys have a new think that they need to build a new product, we ask several hundred thousand IT pros, "Is this what you want?" Or better yet, what we do most, we ask them, "What do you need from us? What are the problems you're facing today you'll like us to solve? What are the problems you can't solve effectively?" We have direct communication with these IT pros every single day. And then our go-to-market model using the web to reach our buyer uses a very low-cost of customer acquisition. It is one of the things that drives our leverage. And when you do all this well together, then you have great customer retention, because our model is focused on the lifetime value of the customer, not the first year license value of a customer. We very consciously built it that way back in 2006. By having great retention, we get very consistent revenue growth and a very high level of profitability, which is one of the reasons, not the only, but one of the reasons we've been among the most profitable companies in technology for the last 6 years.

All right. Last thing, I think -- is this the last thing, Dave? Okay here we go. Last thing for me, and then I will sit down for a little bit. We'll talk a little bit about where we're seeing success and where we're seeing challenges in 2013. So where are we seeing success? I only see success in executing our product strategy. We walked into the year this year with a goal to really accomplish 2 things strategically. And there's a third that we're working on now we'll talk about a little bit at the end of the day. But it was, wanting to get into the MSP market. We've been watching the MSP market for the last 7 years. Ever since I got here, we've been having conversations about every 30 to 40 day -- 45 days about the MSP market. When is that market going to get to the point of maturity? We should play there. When is a vendor going to emerge that we believe has created the right set of technologies and the right go-to-market model that we can leverage and make better? And so as we walked out of 2012, one of the goals was find that company to go and acquire and make that a part of our business, give ourselves ability to reach a very fast-growing segment of the IT marketplace, which is all those small companies out there, less than 100 employees, who have very low IT, a lot of SaaS, little bit of internal IT and they need somebody to manage performance, manage security, manage a lot of different things for them. And as we look at the growth in that marketplace in 2012, we decided it was the right time to move. And we're so far, based on the results we've seen, this year it's been the right move because N-able is growing very, very quickly. And then we had one big piece of the Systems Management puzzle that we needed to add. We needed to add Database Management to give ourselves the ability to really manage that entire infrastructure for IT pros. So we added Database Management in early October with the acquisition of Confio. Great technology, very easy to deploy, very easy to use, very good team based in Boulder, Colorado, and we're really excited to have onboard.

We've had good success in penetrating the Systems Management market. Even this year, our total revenue growth in Systems Management has been 33%. And of SolarWinds Server & Application Monitor, which is our flagship product, if we get that product in the door, the rest of our Systems Management products, we believe, will follow over time. Because it's a great technology, it manages physical service. There's a little bit of virtual server management incredibly well. There's a little bit of application management, a little bit of database management. So it does a lot of things for an IT pro that allows them to look at performance across a number of areas of the infrastructure. And then if they need to look more deeply into different areas of the infrastructure, we now have other technologies they can plug-and-play. We've been working all year to get our Network Management license sales growth accelerating. And after a whole lot of effort, we're starting to see the benefits of a lot of the things we've done in the third quarter. So we saw Orion-based Network Management product sales accelerate to a pace faster than -- more than it's accelerated in the last 6 quarters. So not yet where I want it to be, not even close. But we are seeing progress. We're seeing those -- the growth of those products start to increase. And then we've added over 20,000 new customers in the last 12 months. 20,000. That's why our installed base opportunity continues to grow. We add so many new customers. So many companies who talk to us and say, oh, we added 350 customers this year, okay. We added 350 customers this week, all right, already. So 20,000 new customers in 2012. What that means is the opportunity to sell those companies' more technology. If we do a great job of solving the problem they had when they came and made that initial purchase, and most of the deals we do today are still one product. They come and buy one product, and hopefully they come back and buy the second one very quickly. On average, they're going to buy the second product within 6 months. Nope, almost fell off. That was good. I made it up here 1.5 hours. I didn't fall -- I almost didn't fall. So that is a real key of our model: the ability to add customers at a velocity that no else in enterprise network software can touch. We've got more network management customers than almost any other network management vendor in the world no matter how long they've been around because we reach directly the IT pro, provide them a price point they can afford to solve a very specific problem. The product may solve a lot more problems than that, but they can afford to buy it just to solve one problem. The product may solve 100 problems. They don't have to use it that way to begin with, but we believe they will use it that way over time.

Customer retention. Our customer retention rates measured by total dollars of, kind of, maintenance bookings compared to the opportunity, have actually improved in 2012, and they improved in 2011, and they improved in 2013. So all 3 years, '11, '12, '13. And they're at an all-time high right now. So we've done a really good job of retaining our customers. It says our technologies are incredibly relevant and becoming more relevant every single day. Our installed base initiative, we started talking about that last year at this meeting, that we're really going to focus on the installed base. We've got year-to-date growth of 77% in sales by our installed base team during 2013. We've grown the installed base team globally, and Paul will talk about that in a lot more detail in his remarks. So a lot of success there. And our commercial corporate transaction volume has grown 37%, the trailing 12 months ended September 30. We've seen a decline in average transaction size, which is all set there a little bit, we're still seeing good growth in a number of transaction we're doing every single day, which is really an important metric of how business is performing.

So where we're seeing challenges? We're not going to try to say we haven't had any challenges this year. Definitely our growth in 2013 is not where I'd like it to be. It doesn't in anyway change the competence we have as a management team, in the size of the opportunity or in our ability to make this businesses grow more quickly. I think we've seen some growing pains this year. We had a great 2011 and a great 2012. Things were going really well across many areas of the business, and it really falls back on me. We had some cracks that I just didn't see because things were going so well in 2012, where our sales leadership team globally just didn't have the maturity and the depth that they needed. We've addressed a lot of that. Our marketing team really didn't have all of the depth that we needed them to have. And the maturity and the leadership and really the kind of forward thinking that we needed to continue to be successful. And John Rizzo, who you'll get to hear from here in just a little bit, who joined us as our CMO and CCO, you'll see why I brought him onboard. He's going to bring that leadership and maturity. And underneath John, we've already begun to add people to that team. We have a great marketing team. That team just needed some help. I was asking way too much from a group of very young people and not providing them the support and the leadership and the guidance that they needed, and that really falls on me, not on them. They've been doing a great job, I just wasn't giving them what they needed.

We have had inconsistent demand creation. And that inconsistent demand creation in 2013 has created a lot of different issues. You've heard us talk a lot -- a good bit about our sales execution challenges over the first 9 months of the year, but doesn't really gotten created because the demand that we've been creating hasn't been consistent. It hasn't been consistent in terms of volume. It hasn't been consistent in terms of quality. So we better make sure we do a much better job of doing a consistent level of demand, both quantity and quality, because if we know the quality is going to be at a certain level, then, Paul can staff to that. And we know the quantity is going to be at a certain level. We can staff to that, too, on the sales side. It's when that moves around that begins to give us challenge. And when it moves around by product in a really meaningful way, it also gives us challenge in terms of how we build our sales teams. So Paul will talk in his remarks about how we're managing that complexity, the changes we've made and in order to make sure that we have much more consistent performance moving forward. And then the last thing where we're seeing challenges here is, we added both some technologies we've built, as well as some technologies we acquired in 2011 and 2012 that I call tools for IT pros. So tools that sit on the laptop for the most part that an IT pro uses to solve a very specific problem. It's an individual used tool. It's not a tool that sits on a server. We did an awesome job of growing the sales of those tools in late 2011 and 2012. We grew them at a pace we knew we couldn't keep up with in 2013. The wonderful thing about our model is, our customers trust us. When we bring a new product to market, they're going to buy it. And the early adopters, those guys that trust us the most, they're going to buy very, very quickly. So when you that those tools would drop in revenue a little bit in 2013 from where they were in 2012. They dropped more than we expected. Those tools are important strategically. They're not important to revenue growth over time. They sell an average for less than $1,000. So it doesn't make sense for us, hasn't made sense for us, to invest dollars to make them grow more quickly because it's not what's going to drive the long-term growth of this business. It's not what is going to get us to $1 billion. It's going to create awareness. It's going to create connection with an IT pro. It's going to create relationship with an IT pro. It's going to create an opportunity to sell to IT pro something later, but it's not the right place for us to worry about revenue, but those have fallen more than we anticipate they would. They're still up from an -- if they were new, still do a decent amount of revenue. If they were acquired, they're still doing a lot more revenue than we acquired them. Just they have slowed in growth, and in some cases gone a little bit negative in 2013. We expected it. It just fell a little more than we thought it would. So because as I look at 2013, I say, okay, where have been the challenges? Like where do we go into the mid-20s. That's 30% cash than the average software company. Not great for us, great for a lot of people. We don't consider that great. But these are really the 3 buckets -- I bucketed the issues and try to make it a little more simple. These are really where we've seen issues in 2013.

So real quickly. We've added some folks to the team. John Rizzo, stand up, John. In the back, John, joined us from Jive. He was a CMO at Jive. And he is going to be our CMO and CCO. His first official day was Monday. He spent a few weeks with us back early in October because he had some time on his hands and just wanted to come down and see what we do. So he's gotten to know us a little bit. And Suaad Sait joined us Monday as our EVP of Products and Market. Suaad, stand up. Suaad joined us -- he was the CMO of Rack most recently. And he really understands products markets in the cloud, which is great for us. And then Jason Ream, you guys know he's been with us a long time as both VP of Corp Devt, VP of Investor Relations. He now is our CFO, EVP and CFO. And Bart Kalsu, I know, a lot of you guys have met, is now EVP and Chief Accounting Officer. So those are the new additions at the management team level.

A couple of other recent changes just to talk about some of the things we're doing to address some of the issues we've seen. We've increased the depth of our sales leadership team. We've got an SVP in North America, who we promoted. He's a really strong, young sales leader. He's been working with Paul for the last 4 years to get Paul a little bit more time to focus on global sales issues, so he wouldn't have to focus so much on North America. We've added several North American sales director to really deal with that depth and maturity issue I talked about. We've added a second VP in Europe and 2 new Directors of Sales in Europe. And below that we've increased the number of managers we have to make sure that our rep-to-manager ratio continues to decline. And Paul will talk a lot about that in his remarks. So any questions you have there, save it for him.

We've rolled out our installed base sales structure to Europe and APAC, had great success, grew 111% year-over-year in Q3. Paul will talk a lot about that a lot in his remarks. And we've already done a fair bit of restructuring of our marketing and product organizations with the anticipation of Suaad and John joining to get greater accountability at the product level, increase our investment and awareness of all the problems that we solve, and to make sure we're focusing on predictable demand capture. So those are changes that are in process or have been process for a little bit now that we all think will have a very positive impact on our performance.

So what are our priorities for 2013? So let me make sure, first one, now, I've said this a couple of times, accelerate growth in Network Management new license sales, specifically focused on 3 products: NPM, NTA and NCM. If we sell these 3 products, if they grow fast, the rest of our Network Management product portfolio will absolutely get dragged along over time. We have the -- NPM has the highest attach rates for other products attaching to it than any other product in our portfolio. NTA is the highest single attachment product to NPM. So we're really going to focus on those 3 Network Management products this year because if we can get those back growing at 20%, then the rest of the portfolio will follow over time. We're going to make sure, and I said this earlier, we're going to invest in all our Network Management products to excite our users. We are going to solve the additional problems our users won't solve, our customers won't solve, faster than we ever have. We have more R&D resources right now focused on existing products than we've ever had because we believe if we do that, it will help us accelerate the growth of these technologies because our users love our products. We want them to love them even more and be much more proactively vocal about the experience they're having with them. We want to make sure we accelerate the growth of SolarWinds Server and Application Monitor even further. While it grew 33% year-to-date, I want it to grow faster than that. It can grow faster than that. And if it gets deployed, the rest of our Systems Management products will also follow over time. This is a great product. What it does, it does as well as any other technology in the marketplace regardless of the vendor it come from, and it does it much easier at a much lower cost. And then we're going to make sure we continue the strong growth in the Database Performance Management business. The business we bought was growing. It was growing nicely. And we're going to make sure that it continues to grow. And last thing -- on the other side. We also want to make sure -- I'm going to go to the bottom bullet here. We're going to extend our lead in the MSP market. N-able has great technology. They've got great momentum. I attended their User Conference 2 weeks ago in Scottsdale. They had 700 of their MSP partners from around the world there. They've only got 2200 partners globally. So also almost all their North American partner was there. A handful of the European partner was there. The level of excitement that those partners have around N-able and then now around the combination of SolarWinds and N-able is incredibly high. They are very enthusiastic about what we're going to allow them to do, how fast we're going to allow them to grow. So we want to make sure we extend that lead and really own that piece of the marketplace. We're going to make sure we continue to innovate our products. We talked about that a lot. Make sure they really work together, but they also continue to work incredibly well standalone. Because if they don't work standalone, the strategy doesn't work. We're not going to get at the installed base by selling them a solution. We're going to get at the installed base opportunity by selling them 1 product at a time, and over 2, 3 or 4 years they end up owning 5, 6, 7, 8, 9, 10 products. That how we're going to get at that opportunity.

Demand Generation Strategy version 2.0, that's for John. So John is in charge of version 2.0. He'll give you a little bit of review, not a lot, because he's only been here a few days, so go easy on him. How he's thinking about marketing, and how he's thinking about evolving our marketing model. We're going to make sure we continue focus on our installed base sales opportunity. We still believe the biggest opportunity for us is to grow new customers. So we will see when Paul talks that our investment, our focus is still on adding new customers because that's a bigger growth opportunity for us, much bigger. But there's a really big opportunity inside our installed base. We're having success. We're going to make sure we accelerate that success.

Do I still have to keep talking?

Unknown Executive


Kevin B. Thompson

Wow. I thought I was done.

Unknown Executive

[indiscernible] really just one more second.

Kevin B. Thompson

Okay. You guys need -- we're going to finish this then we go biobreak. Next time, I'm going to move this around. I'm even getting tired, and I don't get tired.

Okay. So let's talk about growth strategy in existing markets, so you get a feel for how we're thinking about the growth opportunities. So we have 3 big buckets. Our existing markets remain underpenetrated. So when you look at the market opportunity, we believe we've barely scratched the surface. Our installed base is absolutely underpenetrated. Our average customer still owns less than 3 products. And we have 29 products today. Every product we have is relevant to every customer we have. We don't have this issue where the products are relevant. They're absolutely relevant. So we've got to make sure we take advantage of that opportunity. And despite all the efforts, and we've grown nicely outside North America, we're still underpenetrated internationally. Only 26% of our business is outside of North America. In software, on average, 55% of business is outside North America. So we should see international grow much more quickly than North America.

To talk a little bit about penetration of existing markets. So we've got about 150,000 customers around the world. That's versus 1.6 million companies that have more than 100 employees around the world and that ignores all the state, local, federal government around the world, and there's more than 1 million public entities, way more than 1 million, which explains where our tax dollars go that there can be more than 1 million government entities around the world, but there are. So huge opportunity, we've barely scratched the surface of.

We [indiscernible] $550 million in commercial new license sales in 2009 versus a $73 billion total addressable commercial market. So that $73 billion market opportunity I mentioned does not include the opportunity in over 1 million public sector entities around the world because that's -- it's too hard for us to really size that in a way we feel comfortable with the numbers, but it's big. So the $73 billion is just commercial market alone. So we've barely scratched the surface of that opportunity. Like I said before, everyday we get deployed an account that have IT management technology deployed. There's not a single account in the world we believe we're locked out of. And we have $318 million in estimated 2013 revenue versus Gartner's annual market opportunity, they believe, of $16.6 billion.

So anyway you look at the market opportunity, we've barely began to scratch the surface. Then you add in the cloud-based IT management market. So that MSP market that serves that business that's smaller than 100 employees. That market is growing very quickly today. Technologies like SaaS are going to cause it to grow even more quickly. Those organizations have very few IT personnel to none, but yet they have to manage security, they have to manage performance, they have to deal with helpdesk issues. All those issues still exist and we have the opportunity through N-able, through the MSP channel, to reach those end-users all around the world. We believe that market is going to grow very quickly. Apparently, we're not the only one who believe that because after we bought N-able, every other company of size other than one, has gotten acquired since that day. So I don't think -- we believe that market opportunity is really big and growing quickly. But the great thing about the N-able technology is that it is very easy to use, very well architected. It's a great platform that's easy to plug-and-play other technologies into, and we can take features and functions out of our products and put it into that platform over time. So we have been able to add technology we believe much faster than anyone else in the market can.

We've got a couple of new products that are -- products they'll be issued and they'll be released over the 2014 that we started to talk about. So in the Network Management side, we're going to add deep pocket inspection. It's one of the things we've gotten a lot of demand for from our customers. The guys from thwack have been telling us you need to give us a visibility into that because it will allow us to troubleshoot performance problems a lot more effectively. So we'll bring that to market as a both standalone product and it'll plug-and-play into Orion.

Within Central, we're very quickly going to take our Web Help Desk product and integrate our Help Desk product into their -- N-central platform. So that will give their users the ability to use the N-central platform to manage their data, manage all the tickets, manage all the issues they need to solve, manage their purchases, all I could give them by Web Help Desk. And the great thing about Web Help Desk, which we've owned for a little over a year now, is it was already built to be multi-tenet. It was already built to be used from the cloud.

In the second half of the year, we expect to get Virtualization Manager and Storage Manager on top of the Orion platform. What does that mean? What that means is it should be a lot easier to sell our Orion customers, our NBM customers, our SAM customers, Storage Manager and Virtualization Manager, because they will have the exact same learning engine and performance engine and they'll be plug-and-play. Today those technologies are lightly integrated, but they'll be completely integrated by the second half of 2014, which will allow us to get to that installed base opportunity a lot more effectively than we're getting at it today.

DameWare is one of the products we bought a couple of years ago now. It works great inside the LAN. So what it does, it allows you to remotely manage somebody's desktop inside the LAN, but does not work over the WAN. And we have over 400,000 users, not companies, users of DameWare around the world. That can -- that are using somebody else for over the WAN and uses us for inside the LAN, because we do that really, really well. So this will be brought to market as a module that they can just add on very, very quickly. It won't be expensive. It's not about revenue growth here. It's about driving an increase in the number of users of that product and then we'll add across our Orion platform unstructured data search during 2014. That will give us an ability to troubleshoot problems, do correlation, manage Big Data as it relates to the things that we manage [indiscernible] a lot more effectively than we can do it today. Because today we really just look at structured data. We believe -- and these are not all the product releases we're going to have, but these are the ones we believe that open up market opportunities for us. They're not open to us today.

On the installed base side, I'm not going to spend so much time on this. Paul will talk about it a lot. But it is a huge opportunity. We have 60,000 core product customers. Those are over 150,000 customers in total. So just inside our own install base, we have a big opportunity to get our customers to buy more technology from us. It's a $13 billion opportunity at our price point, at our average level of discount, assuming they buy the exact same size product that they already own, of all the other products that we own. So this is a very realistic opportunity that we've got to chase down overtime.

Then on the international side, we're just about making sure that we move out of the countries where we've always done well in the countries where we're not doing well. We do real well in English speaking countries around the world. I've been saying that for 2 years. We're not making the kind of progress I'd like us to make. We are going to make more progress in 2013. We need to be more successful in China. We need to be more successful in Japan. We need to be more successful in Germany. They are big markets, but we're not growing at the pace we should. That we just need to do a better job of driving awareness of the problems we solve, awareness of the brand and where we're relevant. If we do that, we should be able to grow much faster outside North America than we're growing inside North America because there, our market share is very small.

So I'm not going to take your questions right now. I'll take some more later, because we're running a little bit behind. So let's move to John. You want to take a -- oh, we're going to take a bio break. Bio break, 10 minutes.


John Rizzo

Are you sure? All right. Good morning, everybody, my name is John Rizzo. I'm going to cover a few things in brief, but this is a little bit of a challenging presentation because I'm the warm-up band for Paul. And we'll see how I do getting him amped up. And then I think Twitter's supposed to start creating momentarily. So the minute I see all of you tuning out and stop paying attention, I'll know it's not really me.

So just a quick background on who I am and why I'm here. So I am a EE by training. My nickname in college was wild nerd. So actually, I've got a great propensity of the people that we sell for -- sell to at SolarWinds. I was the first Product Marketing Engineer at Intel for what is today FLASH Memory, $60 billion market. First product Marketing Manager for the first Macintosh. Apple's a pretty big company today. Ran several companies as CEO -- early stage companies as the CEO. Sold a couple of them.

I was the CMO of the first tablet computer company, which was 10 years ahead of its time. We left a relatively small smoldering crater of venture money there. But tablets, as you know today, are pretty big market. I was also the first CMO of the first established chip company, which we took public in the late '80s. And now, most semi-conductor companies, as you know, are [indiscernible]. So I've had a reasonably long track record, largely in sales, marketing, business development and as CEO of early-stage companies.

And SolarWinds today is a pretty exciting opportunity for me. I, as was pointed out a little bit earlier, I most recently was the CMO of Jive Software. I joined them prior to the IPO, spent a couple of years there. The company grew 100% approximately during those 2 years of time. And came to SolarWinds largely because of a lot of exciting things that were going on. I ended up leaving Jive in early August and then spent the next several months looking for new things to do. And given that I live in Palo, Alto, had a fairly deep access to the more contemporary cloud and enterprise software companies there, companies that you're probably -- maybe familiar with, but pre public and so on. Companies like [indiscernible] and so on.

And so I had a choice to make about what kind of business I wanted to go into in terms of my next deal. Spent the month of September spending a lot of time with the SolarWinds' team. And then as Kevin said, during October, actually I was in Austin for a couple of weeks during the whole months. So I have a reasonably good sense as to what's going on and how I want to take this thing going forward. But as Kevin said also, it's my fourth official day so be gentle with the questions at the end.

So why did I join the company? First, I think that this is a business that is on the verge of some really interesting and exciting growth going forward. I have never had an opportunity to be in a company that goes from the $300 million to $1 billion growth area and that's exciting for me. This feels a lot more like a B2C marketing opportunity, because the buyer and the practitioner are one and the same person. So it feels very much like an Apple experience to me and that's very exciting from a marketing perspective. The notion of a presumptive close process in the sales model that Paul has pioneered over the years, is also extremely exciting and interesting because it puts a lot of pressure and opportunity on the marketing activity leading up to customers downloading and using the product. I also think that the customer base, which is in the hundreds of thousands, from what I've been able to discern in my interviews with customers, is very passionate, very committed to the company, very committed to the brand and very excited about SolarWinds both in the past and in the future.

And then finally, the team dynamic in the SolarWinds management team, with Jason and Paul and Kevin and now Swad and so on, there is a great team commitment now to building what I think to be a world-class marketing and customer organization going forward. So that's why I joined the company, great opportunity and leverage of experience that I've had going in the past.

So how do I think about marketing and when I'm here next year at about this time, you'd be able to give me a score on how I did in the next 12 months. But I think about marketing being a teamwork effort, it's a team sport between sales and products. Great marketing, I think, starts with great products and ends with great sales execution. So that means that we are going to integrate tightly with all the activity in Swad's organization and the products group, all the activity in Paul's organization. It's really important that we team effectively with both those organizations to be successful.

I think the other really important piece, particularly today in the more contemporary modern age of marketing, is that I don't think prospects are actually sold anything. I think they actually make a decision to buy and our job is to create that decision process and capture them at the time of purchase, which is why, I think, the SolarWinds' model fits perfectly with my philosophy about how we're going to market and create demand going forward.

The other critical piece I learned a lot at Apple, is that when a customer has not only a rational relationship with you, but an emotional relationship with you, it creates an extremely strong brand, an extremely powerful means to do interesting things going forward. So one of the things I'm going to focus on is not only helping articulate why rationally and objectively customers should buy SolarWinds' products, but why our relationship with them and how we deal with them and how we connect with them is going to create a more intense emotional connection between our customers and the brand.

I also have a strong feeling coming from the start up world that I spent most of my career in, that small teams do much more interesting work than large teams. So my focus is going to be on growing headcount in marketing more slowly than growing revenue and investing very heavily in automation, investing very heavily in things that allow us to do interesting stuff without adding a lot of fixed cost. And then finally and most importantly, I think the best CMOs are those that have this interesting combo platter of arts, science and leadership. And when all 3 of those are present, it's critical and makes great sense for great success. Art, in coming up with unusual and interesting ideas; leadership, to help the company adopt those ideas going forward; and science, in the context of measuring objectively what's going on, funding more programs that are working, killing most that don't having, a more holistic view of investment and recurrent on all the marketing spend that we're doing. And having been a CEO for several years, I also come to the table with that perspective. It's not about consuming as much capital as possible. It's about making that capital useful and being good stewards of our shareholders' investments.

So some of the things that we're looking at going forward to help us with respect to this more contemporary marketing technologies, I think there's a question answered -- or asked earlier, from a gentleman from Morgan Stanley, there is a ton of technology that we're going to be implementing very quickly inside SolarWinds that helps us bring forth and leverage the scale of the model we already have, but do so in a marketing domain. We have a massive data warehouse inside SolarWinds that we can do a lot of very interesting I call it lead scorings so that we can measure. The propensity of a buyer to buy another product and upgrade and install. The ability for us to look at a visitor to website, identify from which company they are visiting from and then creating a personalized experience for them on the web. The ability to dynamically generate campaigns in real-time. For those visitors to the websites, we have ability to upsell and cross-sell and do more business with them in a much more mass-customized way.

The opportunity to leverage social. As you know, Jive is a fairly interesting company with respect to social and it turns out that thwack, which is SolarWinds' community with over 150,000 registered users, is based on Jive. So I have some sense as to how to apply the external community in social to our whole inbound demand generation efforts and so on. A large number of people today, as you know, are doing search on their mobile devices. A website that has responsive design that works on any form factor of hardware is really important. By moving to that, we have the ability to touch people, whether searching on mobile and desktops whatever. And then finally, the notion of being able to retarget visitors to the website and syndicate content on kind of a macro level, gives us some ability to innovate and again, go back and create this highly personalized experience in real-time, for visitors, which allows us to create downloads, which gives Paul and his team the fuel to move the business along faster.

And then finally, one of the things that we've been working on for a while is a new brand direction for SolarWinds. Tiffany Nels, the VP of Corporate Marketing, has been working on this for some time. You'll see, next year, a rollout of that new brand in a much more interesting and provocative way than we've had before. Again, to create that emotional connection with the customer.

Now, thinking about the whole awareness and demand generation problem going forward, it's important to think about it in sort of 3 phases in 2 ways. The first is what I'll refer to as the awareness and pre-download phase. This is when a prospect is thinking about solving a problem, hasn't heard of SolarWinds, doesn't know we exist, how do we find a way to intercept them in their thinking and searching process on the web. The second phase is after they've hit the download button and are now in the universe of Paul and his sales organizations, how do we effectively move them through the presumptive close process more efficiently, more rapidly and with lower cost? And then finally, when they are a customer and are using the product, how do we take advantage of that fact in our process?

So the -- and one of the demand generation process for me is not just on the far left, it's across the entire touch point across every touch point that our customers have. Going back to that point that prospects are influenced by existing customers, we have the ability to do that if we look at this demand creation and workflow in a holistic way. The other thing to think about in addition to these 3 is of time sequenced steps, is the notion that we're building demand programs against 2 targets. The first are brand-new customers that have never come to SolarWinds before and the second is the installed base. By building programs that are distinct and different for both of those audiences, we have the ability to create more efficiency and scale in our demand gen process.

Now to go through how we're doing this today, largely today mostly awareness and pre-download activities are heavily focused on e-mail campaigns. There's a bunch of other stuff, like SEO and SEM and presence on, but that's largely where we're refocusing today. The next step really is after the customer downloads, there's a process where they'll buy directly, they might install, they might use, they might request a demo of the presales organization, they might have some technical question and then they'll go to close. And then the final point is once the closed customer in our SolarWinds customer base, they get vectored in the support community and then they're encouraged to be a part of FLAC, which is the community in which they participate.

Going forward, the things that you'll see from us are number one, adding a whole additional set of tools to create awareness and pre-download activity. Whether that's IP retargeting, content syndication, blog, social, all that other stuff, there's a broader portfolio of tools at our disposal that we can use to move a larger number of people into that Phase 2 and Phase 3 activity, which helps Paul have more fuel for the sales fire. The other thing that we're going to do and this is denoted by these rotating icons here, is that we're going to build automated steps at every transition point in this demand creation process. So that if a customer has installed the product but has not yet used it, if we can find a way to encourage them to use the product, which then warms them up in the sales process, we now have an opportunity to create yet another sales point for Paul and his team without having to involve a human in the process.

So going back to my original point about small teams and investing very heavily in automation, these automated steps at each of these transitions are going to be important for us going forward and part of our proprietary advantage is this massive data warehouse that connects into sales force, connects in the net suite, connects into our marketing automation systems. So we have a lot of data on which to make informed real-time marketing automation decisions in the activity.

And then lastly and most importantly, is this final notion of connecting FLAC, which is today, largely populated by existing costumers into the presales, pre-download process. If a prospect is visiting us on and looking at NPM for example, and we have the ability to, in real-time identify an existing customer that already uses NPM and broker a connection in the conversation between those 2, we now have a great point of leverage where existing customer who's positive about the brand of the products can in fact then, influence a prospect prior to a download. This creates a very interesting ecosystem of velocity where we have customers being effectively our best salespeople going forward. And we can do that with the automation in place and start adding some interesting technology here to get -- customers be effectively sales prospects -- for prospects.

Okay, so that gives you a sense of sort of where I'm thinking about the future with respect to the pipeline and the management, putting my other hat on and then I'll finish and turn over to Paul. With respect to the role of Chief Customer Officer, this goes back to the comment that Kevin made earlier about creating this connection and this emotional love between our customers in SolarWinds. So we're going to be spending more time engaging with our users in a deeper fashion. FLAC is a great start. We want to increase the number of participants in FLAC. We want to find a way to inspire them to be more involved in helping us sell and we want to have them be more inspired.

So you'd expect that we're going to be much more heavily invested in that part of our business around existing customers. That will also pay rich benefits going forward, because we can use that relationship to help increase sales in the install base. The second piece is to make sure that every interaction that our customers have with SolarWinds is delightful. And we're going to model things more from the consumer world and making that happen because I think today the company's growing so quickly, so many new employees, it's not clear to me that every employee knows sort of the rules of engagement across the customer base. And by installing those systems, providing those educational platforms and so on, we now have the ability to continue to create a deeper engagement and a deeper emotional connection with our customers even as the company scales to great size.

And then finally, we want to be able to expand the notion of Flac, which is largely a SolarWinds island, if you will, to the overall IT community at large. There are many other communities that we engage in, many other brand activities that we're going to engage in to effectively leverage the SolarWinds' brand into a broader universe of people so that we're known more often and in the buying process and the buying decision, people think of SolarWinds first when they're seeking out products for this activity.

So those were my big sort of views going forward. Number one, build more automation into the process; create a larger portfolio of tools to drive downloads for Paul; optimize the brand going forward; and find a way to make sure that every touch point between every employee at SolarWinds and every customer is a delightful experience. So those are the 3 things that I'm focused on going forward. I look forward to working more with the team and super excited to be in Austin. I drove all the way across the country from Palo, Alto on Friday and decided that a couple of things: number one, Texas is actually a really big state; and number two, I really don't want to go to El Paso again.

So I appreciate the time. I don't know if we've got questions, Kevin, before I turn it over to Paul. Any questions before Paul gets up? Yes?

Unknown Analyst


John Rizzo

Your question was, where are we on building...

Unknown Analyst

Building a top of the funnel, where are you in staging some of these things to build awareness and then how long do you think it will take to automate some of these processes?

John Rizzo

So I think a lot of the things that we need to do going forward, a lot out of those motions are already in progress. I intend to speed those up. And so what I would expect that probably in the first quarter, we'd start to see those investments happening. I wouldn't expect a lot of upswing in the demand profile until probably the second quarter. I -- there are 2 ultimate challenges in doing this. Number one is, is making intelligent decisions on the right tool set. I've already built and bottled all these tools so I know kind of where to go. But secondly, getting it all integrated into the sales process and the data warehouse so that we can actually have an objective, scientific approach before we put money over here and it resulted in pay back over here and some reasonable ratio. It can move reasonably quickly because the team has already started in that process, but we can move a little more rapidly now because they have somebody who can help them close the decisions and move faster. Does that answer your question?

John S. DiFucci - JP Morgan Chase & Co, Research Division

It's John DiFucci from JPMorgan. I guess, I'm aware, at least, that SolarWinds, has in the past, used Eloqua as a marketing automation tool. And just curious, are you still -- is SolarWinds still using Eloqua? And even if you are, from my knowledge, anyway, that's pretty much the most sophisticated product out there for that. And I'm just curious if you're going to switch, what's going to happen there? How long is it going to take if you do want to switch? And then I guess this other question is really you and Paul, if you have sophisticated tools, now that you have such a broad product portfolio, is the sales force as sophisticated as it needs to be to be able to handle it?

John Rizzo

So I'll answer the first question and I'll let Paul answer the second. So with respect to Eloqua, we actually -- we're on Eloqua, we moved off Eloqua some period of time ago. I don't know when we moved off of it. At Jive we actually use both Eloqua and Marketo. So my high level philosophy is number one, that the demand generation team has to be entirely self-service with respect to campaign development. That means that it puts a lot of pressure on the marketing automation tools for self-service campaign generation and so on. And that's going to be a #1 criteria, because we can't scale demand at the rate that we want to if we've got a long food chain between, "Gosh, I want to build this campaign. I need to go talk to this person, and talk to this person, talk to this person. And 2 weeks later, I've got a campaign built." So part of it is around agility and building campaigns. That's efficient from a headcount perspective, but more importantly for us, I think about our hundreds of thousands of users and our ability to think about micro segmentation of the market. So if I'm an NPM customer already and I build a campaign, I don't really want to sell them NPM again. I want to build a campaign that offers them something else that is adjacent to NPM, but is highly customized and tailored for them. So the tools have to enable that to happen. So our decision is really going to be made on, number one, self-service and agility; number two, can it connect into data warehouse. As I said earlier, we used a lot of e-mail before, that's just one tool among many. It's not -- it tends to be pretty brute force. We're going to be a little bit more subtle about it. So the tools that we do choose going forward is going to have to be efficient at recognizing all those media sites. Now, to be more specific on the transition, when we moved from Eloqua to Marketo at Jive, which is my only recent data point, we had that up and running in 45 days. Now, did it offer the same level of sophistication that Eloqua provided? No, it did not, but the problem we were trying to solve was much different at that time.

John S. DiFucci - JP Morgan Chase & Co, Research Division

So are you using something different than Eloqua now...

John Rizzo

We are. We're using a small private company that I probably shouldn't talk about, because we're wrestling with whether or not we're going to do that going forward. Kevin, did you want to add to that or?

Kevin B. Thompson

John, you know what I'm going to do? It's a great question, I'm going to try to answer that and hopefully I am already teeing up to answer that in my presentation. So if it's not to your satisfaction, then let's ask it at the end.

John Rizzo

Any other questions? No? Okay, Paul. Are you warmed up?

Paul Strelzick

Oh, yes. So, again, my name is Paul Strelzick, I lead sales at SolarWinds. I'm coming up at -- shortly I'll be coming up on 7 years with the company and thank you for coming. I've met a lot of you over the years. Hopefully, we meet a whole bunch more.

A couple of quick housekeeping things. For those of you who are familiar with SolarWinds, I think you realized, we're all about efficiency. So we'll present right inside the restaurant if we have to, just to save some time. But if you are looking for annuity or reverse mortgage brochures, we don't have them. So -- this is a tough crowd, come on. Come on, a little bit. Is Twitter good yet? I will say, I'm going to go for another joke, how about that? I'm following John, but John assured me that there used to be an old sales adage, don't present right before lunch. So don't keep the audience from lunch. But John assured me that the presentation order was alphabetical and he had me on both marketing, John and Rizzo. So I really didn't have leg to stand on. We're good now? We've warmed up? Can some of you guys move up and take -- no. I don't play well over -- so if you're listening online, and on the phone, this may not be going well.

So, look, from a sales focus perspective, we really have 3 things we do everyday. And we need to accelerate them, we focus on them, but we're going to grow new business. So new licensed products, new customers that continues to be a major focus for SolarWinds. In addition, we're going to accelerate the penetration of the installed base. Key focus for us, Kevin already give a few snippets. I'm going to talk a whole lot about that, but the key thing is we want to be able to do it at a consistent strong level of productivity, in economics that makes sense, and the work within our framework, and continue to provide the world and the industry of the kind of results that we're looking to provide. We want to continue to be the leader, not lag. It's been a little bit of a challenge in 2013. And I'm going to go through a lot of those issues.

So from a sales capacity perspective, our emphasis continues to be on driving new customer product transactions. So that's the focus. We're going to continue to grow the install base. We're going to continue to bring new customers, end-users, and seats into the ecosystem.

Paul Strelzick

So that's the focus. We're going to continue to grow the installed base. We're going to continue to bring new customers and users and seats into the ecosystem. But we now have about 14% of our sales capacity focused on installed base sales. I'll talk about that a whole bunch more, but I just want to emphasize, we want to continue to expand our installed -- our customer base and the products in that customer base.

So from a new business perspective, I know bunch actually and there are a couple of other questions coming out, it is again too complex. John's question, are the web sophisticated enough? So let me talk a little bit about what's been going on at SolarWinds and how we've laid out to address those issues. So we have multiple product segments that are coming in. We've always had the network side of the house. We continue to expand our systems and application management portfolio and now we have the MSP business as well. All nice adjacencies, all serving the markets want to serve. We put additional products underneath them and what that's done is open up a whole expanded universe of buyers. So DBAs, IT generalists, network engineers, systems administrators, people starting up MSP businesses. So it's really a nice breadth of buyer. And I think as you heard John talk about, we consider buyers to be our consumers. So it's much more of a B- to C-type relationship than it is a true B2B relationship. Now -- so what do enterprise companies do with all this? They take what's a little bit of an easy path, right? They go, well, way too many buyers. Just start calling the CIO. He'll let us get into the account. We'll just go heart of the CIO. We'll take all of those products. And again, I used to come from that world and I can tell you right now, there are companies out there where vendors send their rep and the rep shows up into the account and he says, you guys are a million-dollar account, how many products do I have to give you to make a million dollars? And it's just an incorrect approach, right? It's not how buyers want to buy. It's not how they want to sell solutions. It's not even how -- what's in the best interest of the vendor or investor. I mean, it really is living on a credit card. I mean, you can aggregate anything, right? If you just stick with it long enough and spend enough money, but our approach is always to solve the business problem, to develop the relationship with a customer, to build the long-term value of the customer, and Jason will talk a whole bunch about that. So even though it's multiple buyer types, even though it's different products segments, we treat them the same. We're solving business problems. We're identifying the buyer as the consumer. We're focusing on the relationship with that consumer. And we're making sure they have the experience that will bring them back when they have another problem to solve. So SolarWinds, by being able to broaden the types of problems we solve, we can get buyers to come back multiple times.

Now what that has done in 2013 is made us really stop and take a look at the demand creation, the demand sources, the volume of demand and the quality of demand. As you know, out on the web, there are many types of ways that you can get a customer or a consumer to your website, right? So we've looked at those. We've looked at conversion rates. We look at -- so not only where is the money being spent, but how is it being spent. How effectively is it being spent. How can we better optimize the sources that are coming in. It doesn't mean we cut off different sources, it just means we're more aware of them. John talked about a lot of the initiatives that he's looking at around our data warehouse and how we better segment some of those buyers and customers and -- through a little more targeted approach. But the key thing is, from a sales perspective, if someone comes into solve a problem, be it in any of those product segments or any of those buyers, we want to be able to address their issue as frictionless and seamlessly as possible, provide them a quality experience, solve their problem and let them know SolarWinds is trusted to be able to come back when they have another problem that we can address. So this is what we've done. We really looked at how do we increase sales capacity effectively, right? And how do we increase SE capacity so that we're not this generalist sales approach, but we're really able to be trusted to the consumer who's coming in to solve a problem. So we want our sales engineers to be specialists in those areas to both interact with customers in the right way, gather feedback that we can get both on thwack but also through these multiple customer-facing interactions and literally provide sales reps that can address issues, show products and take them through a positive experience. So we've done that. We've started that process. We expect to continue that and Jason will talk about a number of the investments we're looking at.

As Kevin mentioned, we have brought in more experienced sales management. That has been both through acquisition, it has been through hiring, external hiring. And we also continue to have a strong philosophy in internal promotion. So those 3 components are tying together. And our real goal is to make sure that we SolarWindsize them, for want of a better adjective, and that we really let them know what makes SolarWinds unique. Because I tend to tell people, if you came to SolarWinds just to sell software, you're missing 90% of what makes us unique. So we've -- and I'll talk a little bit more on another slide, but as Kevin said, we have staffed up our European operation with senior sales management. We have increased North America. We've made some positive changes in our Asia-Pacific region, in our installed base team, and we just continue to make sure that we're increasing this -- oh, I'm sorry, decreasing the rep-to-Manager ratio. So the more we can keep it in a nice ratio, right, a Manager for some X number of reps, I can tell you, it varies a little bit, but just having managed these types of teams before, a pretty good ratio is about 6 to 8 reps per Manager. That's just a good number and probably any company would tell you that. I mean, we've really tried to, in certain areas, just make sure we're at least within those numbers and where appropriate, done other things. So you can notice, I'm not giving you exact numbers of any way, shape or form, I'm just giving you some industry standards. But we think maintaining a really strong rep-to-Manager ratio is very effective for us and I think we started seeing that come more back into our line in Q3. And then as many of you, I'm sure, have noticed, because you probably get, hopefully, Google Alert on SolarWinds, we opened up an office in Utah, as the secondary North America office and also through acquisition, both in N-able Up in Ottawa and now Confio in Boulder, Colorado without access to a more diversified talent pool, both from management and for sales rep capacity. So what is Austin's grade? I mean, Austin's phenomenal and we've been able to hire how we wanted to hire in that area. This really broadens it quite a bit. So both the managers we've been able to bring online, I can tell you, some of the North American senior leadership hiring has been in Utah, which has been great. The acquired team up in N-able is fantastic. So we really think we've been able to expand the senior leadership team, improve the rep-to-Manager ratios, improve our orientation around how do you get them barred into -- not barred into but improve the Solarwinds' DNA that they're operating under every day and then just continue to have access to that scalability, will give us those consistent and predictable results that we've been looking for and that we've provided over the years.

So let me talk a little bit about the -- so that's the new side, also blending a little bit into installed base. Let me get a little more focused on the installed base opportunity. Some of you have seen this slide before. Let me put a little different fresh perspective on it. So this is the market opportunity within our installed base that have core products installed. Follow me on this one. So the bottom line is if we sold all our core network products to our existing core network products, it would be worth $920 million. That's the opportunity, right? And you can buy into, well, you'll never sell everyone everything, sure. But a small percent of a large number is a large number. So that's if we just sold all our core network products that someone didn't already own even though they're a core network product customer. Second one is if we sold our Systems Management products to our Systems Management core customers, right? Again, another $970 million and you go up the line. So this really is just focusing on customers who are already running core products and our ability to cross-sell with the existing portfolio we have into that installed base.

So that adds up to $4 billion, and again, that is existing customers who are already using us for at least one of our core products if we just sold them more core products. It is a big number. Now the trick is how do we effectively sell into that with the right economics, with the right productivity, with the right efficiency, without undermining customer relationships? Again, if I'm a traditional enterprise company, I'm probably going crazy on that thing. But you've seen me present before, you know I like to present in pictures. So here's the analogy.

If you wanted to get your house -- so say there's -- you're in your house and some guys show up at the front door in painter overalls and they knock on your door and go, hey, you want your house painted? You're probably going to lock the door. That's an enterprise sales company, right? They show up unannounced and they just start banging on your door to figure out if you want to do something, come on, that's a good analogy right there.

The second one is, say you actually have a little bit of a problem and you wanted to do some painting at your house. You show up at a store to buy a can of paint and the clerk says, great I'm going to send a team out with lauders, paint, I'm going to do your whole house, but it's going to cost you $10,000. Again, neither of those interactions is serving your problem. So we want to make sure we're not doing the traditional thing, because if I'm an enterprise sales company, what I'd do is hire a whole bunch of guys, start showing up at doors, lobby sit and really offending people, right? The way they want to be sold to now is they just want to know that we have certain products that can help them in their daily activities, that can solve their business problems so we'd be more like saying, hey, customers who bought this have also bought this. You educate them, maybe you guide a little bit. You really just want to take them through a positive experience, because a lot of times they just go, oh, yeah, I do have that issue. So again, just keep in mind, SolarWinds sales reps don't create demand, they respond to demand. So we are trying to be the most efficient, productive, high-volume, high-velocity sales team that will give the best customer experience and address this market. So we've created -- we talk a lot, John, about our systems being incredibly efficient, optimized for velocity, optimized for customer experience, really take people through that experience. We've now created a new application inside SolarWinds that we call our installed base application. Its proprietary. We built it out to address this very issue. We can now give reps a very clear outline of how an installed base customer has bought what their concerns have been, what their experience has been, what other products they may need, right? Again, think about it like Amazon. Customers who bought this have also purchased this. So it's a very consistent theme around, hey, let's educate them on that. If they're interested, great. If it's not the right time, then we're not going to start pounding on their door just to try to get their attention. It's very customer focused.

And then, if you look at the next piece, as Kevin talked about, our tools. Our tools are in 2 buckets: We have Systems Management tools and we have network management tools. If you did those customers, which represent tens of thousands of customers who only own one of those individual tools, if we were to sell them core products, right? So if we can upsell them to our core products, then the opportunity, again, keeps scaling up to the point where it's a $9.6 billion opportunity over $13 billion, just -- even if we didn't add another customer, just getting into this installed base effectively and efficiently. So again, it's a big number, and I know you guys probably see lots of big numbers all the time but just keep in mind, a low percentage of a big number is still a big number and we think this opportunity is huge. It's really just how they do it the most efficient, effective way. And that doesn't count that there's another $500 million in our installed base using core customers that if they just upgraded 1 or 2 levels, it's a multi-hundred million dollar opportunity. So again, a number of different ways we can go about this, we've started setting up, as I put on the previous slide, about 14% of our sales capacity is now focused on making sure we're going after this effectively. We're successful in all this today. We do it through a combination of marketing messages, through product messages, through sales efforts. But now, we're really stepping back and saying, let's make sure this capacity specifically assigned to opening up this opportunity and bring this to fruition.

So again, as Kevin talked about, here's the results we've gotten on that installed base initiative around that installed base team who we also refer to as our IBA team after the -- it became somewhat circular. It's the installed base team using the installed base application that somehow became now the IBA team, but stick with me. So with 98% growth in Q1, 36% off a little bit tougher comp from Q2. Q2 last year was when we have a lot of initial success to try to get things going. We had -- and that's what spurred us to create this IBA application and really start dedicating resources. That was still -- as you know, at SolarWinds, we're willing to try some things as long as it's cost-effective. We went out during Q2 last year, saw success, said, okay, we need to now get this going, and 98%, 36% growth, 111% growth driven last quarter by strong North American growth of 74% but also rolling out this capacity to EMEA and to Asia-Pacific. And we'll continue to do that. We have a team now up in our Utah office, we have some leadership up in our Utah office. We split it between a number of the offices. But again, it's a big fertile ground for just continuing to expand this -- take advantage of this opportunity. So the growth has been nice. It's going to -- comps will get tougher as we keep going, but it's nice to see that up to the right perspective on this chart.

So again, we don't create demand, we respond to demand. So if you look at how we add capacity, we are trying to add capacity in line with our demand creation. So when Kevin talked about we've had some inconsistent demand creation and now John's here, and let me also add, I couldn't be happier that John's here because I think this is going to be great. We try to add online. So as demand gets more consistent, it just makes it more -- it makes it more efficient and effective when we're adding sales capacity. Whereas what traditional enterprise sales orgs do, and you see it in the press all the time, right? They do an earnings report and they go, we've increased sales capacity. And immediately, you guys probably go, well, if they did that, I should start factoring in productivity 6 to 9 months from now. Maybe you give them 3 to 6 months.

Because when they're saying they're hiring capacity, that literally means they're going to start from scratch, day 1, start creating demand, get 90 days in, try to figure out if the person's effective, good, doesn't know how to find the bathroom. I mean, whatever it might be, our reps, really, we have a short lamp time. So we will know, because we're responding to demand, we'll be able to tell pretty quickly if it's the right rep, the right quality of demand, the right volume of demand and we want to keep those 2 mirrored in line. So we'll continually invest in marketing, we'll drive more of that download demand and then continue to staff appropriately and see the shore ramp times so that we have a very rapid visibility into performance. Whereas again, how many times have you guys seen, I can think of at least 1 or 2 vendors, of the time they had that every earnings call they talk about adding capacity. And then you're like, well, what happened to the capacity you added last quarter? Well, those guys didn't work out, but this new crop is going to be stellar and this new crop is going to be stellar and eventually, they're just like, okay, it just seems like you're hiring and firing in almost one-for-one.

So I'll talk in another slide about the productivity impact and I think if you're familiar with SolarWinds at all, you know productivity is key for us, and Kevin talked about, look, maybe too much sometimes we worry about the ROI, but our sales rep productivity is a key metric I want to track because I don't want to get into the habit of spending $2 to grow $1. I mean, that just doesn't makes sense. So new rep capacity on traditional enterprise company, I think, depending on the capacity, you're going to have a pretty serious impact.

So this is our trailing 12-month sales productivity, right? You could see it was coming down. Q1, Q2, look, it was too low. I mean, we just didn't staff appropriately at that point. So expenses were just too low in those 2 quarters. Q3, no big surprise on results, came back up a little bit more consistent back in 2, 3 and 4 of last year. I mean, the reality is, we're going to try to make this more consistent with the spend and the productivity, but I'm sure if any of you guys were investors or whatever you're looking to do, if you remember us from 2011-2012, I'm thinking you want us to be back in those type numbers, right? Those were good years. So Q1, Q2, a little too low. Ramp capacity, back up, get the expense back in line. But the other key trend about this is, that SolarWinds isn't dumping a bunch of money and getting no return on it. I mean, we still are getting a very -- the productivity band is narrow. So we invest, we're getting the productivity pretty consistently, but we want to get back up into those consistent numbers of 2011-2012 because that's the best indicator of how the overall results are going to end.

So quick summary slide, or long summary slide, depends how much you guys want to go into detail. But really, look, as we've grown as a company, sure it gets more complex. You want to scale the organization, you have multiple offices, multiple segments, different buyers. But as Kevin said, there are core tenants that continue to guide our activities. We have adopted our process, yes, John, to your question, we have had to get better at giving orientation and training to reps. So to change your comment a little bit, it's not that they're not sophisticated enough or maybe that you meant what I'm about to say, it's that we probably were putting them out there without giving enough through SolarWinds' training. Not over the last 5 years but over the last couple of quarters, I mean, if we did have the right capacity and we really needed some more people, we needed to change our -- be stronger in some of our hiring practices, interview processes, recruiting practices. I think you all know we had hired Jen Rothfeld about a year ago. I mean, she's been key to that whole thing and then really bring orientation to the 4 as a key part of our on-boarding processes. And I'm going to tell you, it's not a month, it's not 90 days, I mean, I know there's at least 1 big enterprise vendor, he used to ship everybody in their headquarters and put them in a hotel for a month. We still have a very SolarWinds-like orientation but it is much more sophisticated than it was even 6 months ago. I mean, we want productive reps. We want to keep that productivity up. So -- and then the management infrastructure, as I talked about, the rep-to-Manager ratios, we brought back in line. We continue to hire more senior managers. We want to have senior leaders. We want to continue internally promote and we want to make sure we got a leadership team that is completely confident in the way this model operates so that we can continue to provide consistent predictable results.

On the capacity side, increase leadership. It allows for better bandwidth because I think you've heard me saying many times, this is one of the most sales management intensive organization I've ever had to run or even heard of. So having the right managers in place is critical to scaling. I mean, it just is a key part of what we do. From a rep standpoint, we have increased our installed base team. We've increased international and within North America, we've expanded now with Utah sales office. So while we continue to hire in Austin, we're also continuing to expand in Utah with that new labor pool.

And then sales engineers. As you have those multiple buyers, we want to maintain credibility. I mean, we just don't want to be known as, oh, you guys seem to know everything about networks and nothing about anything else. So our sales engineer organization is scaled, commensurate with the growth and capacity in -- overall and domain expertise is key. I think you'll see some of -- you've seen press releases from us about some of our Microsoft MVPs and just expertise around any number of disciplines within DB -- database, administration network, management, Systems Management, et cetera. And then we cross train. So at least, people aren't siloed into if I'm DBA and a Systems Management opportunity hit me on the head, would I know it? We're going to make sure they at least know it, right? And then funnel it the right way. So goal. Consistent performance, consistent economics, growth in all the metrics we want to have. They're moving in a positive direction.

So Q&A.

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Rob Owens from Pac Crest. So for the last 2 or 3 years, I think you've talked about these same opportunities, possibly and some of the same slides in terms of cross-sell, in terms of international. So maybe give us a sense, I guess, why it's not a bigger percentage, why you're not seeing more growth internationally right now. I know culturally, there's been issues in the past in how you've moved in the regions. And second, I'd like to question just the sales capacity, because I know you entered into some capacity issues last quarter and I think the MO was hire, get people in seats so you'd have the right capacity. Is that -- are those management challenges? Is yours somewhat constricted as the scale of the business is getting so big and you kind of addressed that in your talk, but we'd love for you to just talk about those, I guess, 3 issues.

Paul Strelzick

Okay. As I was going to say, there are 3 issues. But first, I have to address, these are completely new slides. So just for this audience, I wanted to make sure we used a whole fresh approach. So these are completely new slides. So 3 things. One, let me talk about international a little bit. So I think you know from the earnings call back in July, I mean, Q2 was a tough quarter in Europe. So we did have a little bit of a challenge there. I mean, it was not what we would have expected. And so, and the results made international look a little harder. I mean, it was a -- we made a big difference in the overall percentage of North America versus international. We've talked about it a bit. I think the challenge we've run into is we needed more senior leadership and we needed more senior local leadership. So we had been using expats in EMEA for a while and now all the hiring we've done from a senior sales leadership is based in Cork, Ireland. They're all Corkmen and I think that's going to make a huge difference in both the consistency, the predictability, the networking, the ability to recruit. I think there's going to be a lot of overall benefits to that and we have great local leadership in Singapore that has been doing a great job in our Asia region. In our Pacific region, we've now establishing offices in Sydney, Australia and I think that's going to be a great market for us both from a labor pool perspective, to be able to recruit the people we want, the types of people we want and really continue to expand that. So I think international is now getting enough of the focus to start getting the kind of growth we want and getting into that balance Kevin talks about where international should be a larger percentage of revenue than it is today. There is an emphasis on this. Kevin said, we've recently promoted someone to Senior Vice President, he owns all of North America. He actually owns Latin America, too. So he Americas and it's opened up an opportunity for me to spend more time on international. Whereas before, it was a little too -- it was probably too consistent across the whole thing, even out that offload some, scale a little more, put some -- delegate a bunch more in the North America side and then focus a lot more on international. Now I can't remember your other question. I think those were -- oh, capacity. Yes, I mean, it's been a little bit of a catch 22 in that. Without enough of the season sales management, we just weren't doing a good enough job staying current on capacity. So although we were budgeting for it and we were recruiting and we're interviewing and we are were bringing them in, I would say our net adds weren't growing fast enough. So we ran into a situation like in Q2, where we did some managed exits from the company on the sales. So capacity has taken a little bit hit there. We just didn't hire fast enough, both from a replacement and net add standpoint. I think that was just a management bandwidth issue. So a big emphasis on that now. Every Sales Manager knows they're truly responsible for their team. We've worked out all the budget. So we have allocated budget for it and it's a effectively, although not a specific component of MBOs. I mean, the managers know that as one of the critical components of their job function now, both recruiting, hiring, orientation and productivity within the windows we've set up internally. Does that answer?

Robert Scott Zeller - Needham & Company, LLC, Research Division

Scott Zeller from Needham & Company. I wanted to ask about the allocation of sales heads to installed base sales. I think in your earlier slide, you mentioned that 14% of sales capacity is dedicated to the installed base sales effort. How has that looked in previous quarters? I think that maybe the first time we've heard a hard number around that breakout?

Paul Strelzick

Hard percentage number.

Robert Scott Zeller - Needham & Company, LLC, Research Division

Percentage number, yeah.

Paul Strelzick

I mean, I'll leave that to someone else but I can tell you, a lot of that increase was due to roll out in EMEA and Asia-Pacific. So I couldn't even tell you what the exact breakdown was 6, 12 months ago. It's increased as a percent of overall because we have expanded North America and rolled it out to EMEA and Asia Pacific.

Kevin B. Thompson

What I'll tell you, Scott, is that, that percentage is up meaningfully in Q3 from where it was in Q2. I don't know the exact number, but it was sub10% of the sales team focused on installed base because we rolled out during Q3, Europe and Asia, and we increased the size of our North American team in addition to hiring an installed base team, in addition to hiring a Director of Sales just to run that installed base efforts. So we are making a meaningful increase in investment in that part of the business. But at the same time, you can tell by the chart, we're continuing to hire pretty rapidly on the new business side. Because we do believe, and I said earlier, the biggest growth opportunity for us continuous to be adding new customers, 20,000 new customers added over the last 12 months. That's what driven -- made that installed base opportunity grow by $2 million in the last 12 months. So we have primary focused on new customer adds. But at the same time, you'll see us continue to ramp the number of reps we have on the installed base because our entire team, they don't like this but I'm going to use it because I love it, I call the installed base Santa's bag, it never gets empty. You can pull a canoe out, and then you can go pull a dump truck out because we're just keeping stuff in, fashion them when the reps are pulling it out. And so we'll continue to add capacity as long as the productivity level is where Paul want it to be. There is a pace -- you could say, "Why don't you just add a bunch of people?" There's a pace in which you add to it quickly no doubt and get out in front of the inbound demand we're generating from that installed base, which is why we don't just throw hundreds of bodies at it.

Paul Strelzick

And we really do love the Santa's bag analogy. It's one of our favorites.

Aaron Schwartz - Jefferies LLC, Research Division

Aaron Schwartz from Jefferies. Maybe a follow-up question on that exact comment. You've been very consistent enough here talking about not hiring ahead of demand. You've sort of stressed that since the IPO or even before that. I mean, if you had the Santa's bag, and you have this unlimited growth opportunity from your installed base, I mean, why not hire ahead of demand? What gets you to change that? Because even just to give yourself a little bit of margin for error for some of the hiring things you went through here where you were behind that?

Paul Strelzick

Right. I mean, really it's a triangulation of, we have to make sure the customer experience is good. A lot of -- I believe that the consumer, right, our buyer is like, "Well, you guys are starting to act like everybody else." Now you're just harassed. Now you're really starting to go out cold call prospecting. You really -- the customer experience is still so critically important to the lifetime value of the customer that what we're trying to do is how to add capacity in that team in a nice balanced pace that we can get the right economics and the right productivity, but also countering that we're not undermining the future. Because again, as Kevin said, we can throw a ton of bodies at it. We can go, and they can start knocking on -- by knocking on doors, I don't actually mean knocking on doors. But they can start pounding on the phones and they can -- they will get deals. I mean, there is no doubt they will get deals. But the issue is, at what cost both from that team? But more importantly, what cost in the average value -- lifetime value of that customer? And that's what we're probably a little more concerned about because our real strategy as a company is that lifetime value of customer. So yes, we can go goose results pretty rapidly, right? I mean, I'm confident we could do that. Any sales manager could show up and do that, but it's the long-term cost is -- we're not sure -- we're not confident that we're not going to undermine the long-term value of the customer.

Aaron Schwartz - Jefferies LLC, Research Division

And then maybe a follow-up, when you gave the metric of, I guess, sales reps for inside sales versus, I guess, new customer sales or sort of the mix there, I mean, it seems like you've got good relationships with your customers. It seems like you could hire more aggressively there and maintain that sort of good lifetime value with the installed base. Can you talk about sort of the hiring overall into the installed base, sort of the growth there where the body should come going forward?

Paul Strelzick

Well, again, we continue to want to focus on the new customers, as well as maintain the relationships with existing customers. So the customer experience is critical. I think to your point, we bring in capacity, and we are serving our customers in a number of different ways. I mean, if they come in into the website and download, I mean, we do serve them different than the installed base team working with them on some adjacent products, if you follow me. So we'll continue to grow the new customer acquisition side of the house, and we'll continue to expand the installed base opportunity. But again, it has to fit into the right because -- it just has to fit into the right economics, and it can't undermine some other growth part of the company.

Kevin B. Thompson

Well, I think one thing to keep in mind, Aaron, is if you go back 4 quarters ago, we didn't have any reps focused on the installed base. So it's gone from 0% of our total sales team to 14% of our sales team really over the last 4 quarters. So we're moving pretty aggressively. We're willing to take a little bit of risk. And we're willing to add reps relatively quickly, but we really focus on the productivity metrics at the pace at which we add. So we have put a bunch of reps into that team over the last few quarters. It's in the plan. I've talked about it. Paul has talked about it. We'll put more reps into that team literally every quarter moving forward, as long as we continue to see the level of demand and the level of productivity be at a level that we're comfortable with. And as long as, to Paul's point, that we don't see any customer fatigue. So we can be aggressive. We are being aggressive. But to take it -- to move it much faster than we have, the risk we would have run over the last year is that we ruin the creative processes that would create success. And so what we spent the last year doing is making sure that we have a defined set of processes that allow an installed base rep to be successful. And so, we have probably more than doubled the size of that team in the last 4 or 5 months as we've gotten comfortable with the IV application. Paul mentioned, we needed to get that built before these guys could really be successful. So it's not as simple as throwing bodies at it in the way we think about going to market. There are companies who would do it that way. Goes back to my earlier point, but those companies are doing $400 million in revenue, and they have negative 27% operating profit. And personally, I just don't believe that's the right way to build a company. I think the ultimate value of any company is how much cash flow it generates. And there's way many -- too many companies in the marketplace today that may never generate $0.10 of positive cash flow. And if you want to go back to 2000 and walked forward, I can list you 40 that went public at very high valuations and don't exist today because of that approach to building a business. So it's a combination of factors, but we are investing aggressively in growing that installed base, but we're going to do it at a pace where we know we can create success.

Unknown Attendee

Paul, can you talk about where you're standing through the sales engineers capacity and also the processes that connect the sales force with the sales engineers, where that stands?

Paul Strelzick

Yes. So let me kind of answer that maybe in reverse order. So our sales engineers sit on the sales floor with the reps. They are right in the rows. We've set up a lot of processes around availability of sales engineers. So again, keep in mind, if a customer comes in and downloads the product, as Kevin talked about, we really want those products to have obvious value out-of-the-box, the customer experience to be positive, but there are sometimes they want a little more handholding or a little more explanation or whatever it might be, and that's where we engage sales engineers. So I can't give you the exact ratio of reps to SEs. We try to keep it very manageable. I will tell you, it is -- whereas an enterprise company many times has a 1:1, every rep needs their own SE. They go out and basically do 4-legged sales calls. For us, it's nowhere near that ratio. I mean, we have x number of reps to every single SE. We have the SEs broke out by product discipline though aligned by the buyer type. And so, they have domain expertise in that area, and they engage more likely on either more complicated deployments on a pre-sales basis only or on the ones where people just want a little more experience -- they just want to talk to somebody who's a little bit more knowledgeable around that domain expertise. So it's a ratio that's much more in line with like an inside sales type team, but it is very specialized around domain expertise. Did that answer enough or?

Unknown Attendee

And are you in that ratio where you need to be or do you need to find...

Paul Strelzick

No. I think we're now in the ratio we need to be. We've increased SE capacity and also through the Confio acquisition, we've brought a bunch of DBA expertise as well. So I think we're in the right ratio, but we'll continue -- we always have to continue to keep that in line as we add more sales capacity to make sure we have the technical support they'll need as well or putting new products to market that may require some specialization. We'll make sure we're bringing that online as well.

Unknown Attendee

Paul, jumping back to the installed base sales, can you give us a sense, is it -- are those deals materially different as far as ASP or velocity?

Paul Strelzick

Great question. So the real answer is no, not really that much. I mean, once they enter the point -- so again, if many of you are familiar with the sales funnel, at some point you create the opportunity. If you're familiar with the SolarWinds' approach, the opportunity is basically created when the customer is engaged at a product evaluation level. So engage with sales at the product evaluation level. So from the point of opportunity creation, they act just like everything else. But from an ASP perspective, from a sales velocity perspective, because it's at that point that we're tracking, now I will tell you because they've been through the process, sometimes multiple times -- and I think Jason's going to talk a little bit about that -- I think the customer experience may go a little quicker from that standpoint. But once they're looking at the product, we don't see a whole bunch of material difference, and I think that's a testament to both -- even if they're a new customer, the product evaluation is very powerful. If they're an existing customer, they're still like, "Hey, I want to take a look at it. I want to make sure that it's what I'm looking for." And we don't try to rush that process. I mean, we really want the experience to be positive.

Unknown Attendee

Okay, good. And then a quick follow-on. In years past, we've been concerned that potentially you might tap out Austin as far as a talent pool for sales. And now you're expanding into Utah, have you reached that point or maybe you've changed the profile to higher? Maybe you can help us with that.

Paul Strelzick

I don't think we've reached that point. But clearly, look, SolarWinds has been phenomenally successful. You guys know that. So is there -- a lot of people like SolarWinds people. I mean, is there a whole bunch of more competition around certain areas? Absolutely. But at the same time, Austin is a big market, getting bigger all the time. Thanks to -- it's a pretty big technology corridor. So there are a lot of experienced people moving in. I mean, Austin is one of the highest growth areas in the country. So that labor pool keeps expanding and technology expertise keeps expanding. But we really thought it was better to open up a second location maybe to address some of the same concerns or at least to make sure we don't run into those same type of bottlenecks. And it's been great for us, I mean, that diversified talent pool, but from a manager and rep capacity standpoint has been very strong for us.

Stewart Materne - Evercore Partners Inc., Research Division

Kirk Materne with Evercore. Just maybe a follow-on to Tim's actually. Can you say -- I just had a question also from a European perspective. As you guys go into more locations in Europe, the ability to find multilingual salespeople that can now sell 29 products. I'm not sure how many are solely in Cork, Ireland. But if I was worried about you tapping out a location, it might be Cork, frankly. And then secondly, along the idea of more broad-based product suite, I guess now that you do have some competitors trying to do some of the same things you're doing in places like APM, do you need to start thinking about some specialization within the outbound sales force? I know, never to the extent that others are doing it, but I guess how does that play into your ability to really reach in to a lot of these markets in a deeper way?

Paul Strelzick

Yes, so probably 2 different things. So in Cork, we've -- Cork is a pretty international city, so there's a lot of multilingual people that live in Cork. So that's been a big benefit. Through the N-able acquisition, we also have an office now in Utrecht, Netherlands. And that's it right now. So when you said, why the multiple in Europe, we actually don't have that. I just want to make sure I'd stress that. But our hiring in Cork has not seen a downturn. If anything, we've probably seen a little bit of an upturn over the last couple of months. And we continue to be able to staff appropriately in Cork. So we keep an eye on it. I mean, we clearly look at interview velocity just the same way we look at deal velocity. I mean, we want to make sure we've got a ready pool of candidates. So we'll continue to focus on that. I mean, I think if we'd ever got to the point, I would go to Kevin and Jason, and be like, "Hey, we're running into some issues." But haven't seen that at all. To your second point, keep in mind, a lot of what you just discussed is a little bit more up funnel. I mean, we want -- we sometimes set up product specialization sales teams if we think we can increase velocity, increase customer experience, keep the funnel moving. But really if the customer is evaluating based on what they're seeing pre-download, right, then a lot of that goes away because it's not like -- it's not whether a competitor is doing it or not. We truly look at the world as the world's biggest assumptive close. If that buyer goes to the website and evaluates it, then he already thought we were somebody who could solve his problem, which is much different than a guy who we reach out to and he says, "I'm looking at somebody else," and we think we better get into a big bake-off with them. And it's just a much different thing.

Kevin B. Thompson

So let me give Paul a little bit of a break. So we're going to take about 10 minutes of questions on kind of any topic we've covered so far this morning. And then -- because lunch will be ready at 11:30. I want you to grab lunch and then your bio break, all that kind of stuff and then Jason will come in and present. So go ahead and starting -- getting 10 minutes in and breaking for Jason. We'll take kind of 10 minutes of questions on any topic we've covered. You guys can ask any question, even if we haven't covered it, and I may or may not answer it. But you know, I'll say it nicely if I say no.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Kevin, John DiFucci from JPMorgan. Just sort of a high-level question. And thanks for all the data and all the sort of detail from your team here, but something obviously changed at SolarWinds a few quarters ago and you guys have been executing really well. And then you missed a couple of quarters. And even last quarter, I mean, we're not satisfied. You hit your numbers. That's great. But actually -- growth actually declined from the 2 quarters that you missed. We look from -- where we sit as analysts and investors, we kind of look at what's changed? And Paul actually being up here is interesting, but he's actually one of the more consistent, things haven't changed as much because he's been the leader of that team and he's been driving that. We come to the conclusion, we look at the products, the products have gotten -- getting broader and more sophisticated. The macro environment, yes, it's been tough for a few years, I mean. And I know you don't point to that as an issue, but it's been an issue, and it continues to be. The thing that we wonder about is -- one I wonder about is marketing. So having John on board now is interesting because we did see that change. You had Rita, then you had Geeta and...

Kevin B. Thompson

Hard to say, both of those aren't here.

John S. DiFucci - JP Morgan Chase & Co, Research Division

And now you've got John coming on board, and that actually -- it's promising. I know he's just got here, but to hear what he -- some of his initial thoughts are good, but that's one thing that's changing. The chief marketing officer for a company like SolarWinds is a lot more important than it is for a lot of other companies, I think, that I cover anyway. And then the other thing that you keep getting asked, and I keep getting asked, has something else changed in the market? Are there some secular or constructive things that you've just come up against the wall, if things like that change. So those are the 2 things and that's why -- so it's been a few quarters. And now John just got here. And he's going to have his own ideas. And that's great. But then like, how much longer is it going to be? If it's that. If it's -- I personally don't think it's the issues with the market, but I get asked that everyday or my team gets asked that every day. Is there a structural problem here? So if you can address those 2 things like, really the marketing thing and then also just because...

Kevin B. Thompson

Yes, so look, what I'll say, and I think I went through this in my initial remarks, I don't think there's any issues with the market. There's no issues with the size of the market opportunity. There's not an issue that the products we sell are not continuing to be very relevant. And in fact, we believe they're going to be more relevant as we move into the future. So the size of the opportunity, the immediacy of the opportunity, we absolutely believe is there. What I've said consistently is, is we've looked backwards. And hindsight is always 20/20. That we just haven't executed at the same level in 2013 than we did in 2010, back half of 2010, 2011 and 2012. And I think some of that comes down to more structural internal versus structural external, meaning, I think you made a good point, and I made this point that we just didn't have the depth of leadership in a couple of areas, marketing definitely being one. Great team, great young people, work incredibly hard, very committed, very passionate about making us successful, but they needed a CMO better than me, right? So I'm not the guy who ought to be the CMO, but too much of that burden has fallen on me over the last 12 or 15 months, not because Geeta wasn't good or, even before her, that Rita wasn't good. They just didn't have kind of that scope and that ability to took at the world in a new and different way and handle the scale that we had reached. So we need to do that. And that's more than just John and Suaad. So John and Suaad coming in, they're going to be a big boost. They're both senior leaders, have a track record of not just success, but a track record of leading teams. I think that was what I went out to look for. When I said, I need to add a couple of folks to my team on the product marketing, product strategy, marketing side of the world. I needed senior leaders who could really provide guidance into a really great team and help that seems scale. And that's absolutely something that we should have done sooner than we did. And more than anything, that inconsistent demand creation has been painful during 2013 because it hasn't allowed us to get in a rhythm. I've said before, for 3 years, Paul hadn't missed his forecast by more than 1% that he gave me on the first day of the quarter for 3 years, 12 solid quarters. We came into this year and things started to move around a little bit is because of the inconsistency of what's coming into the team in terms of quantity and quality, started to make our metrics not move as much as we wanted -- not to behave the way we wanted them to behave and expected them to behave. Now that was better in the third quarter. Yes, we didn't have quite the third quarter I wanted to have. It was solid. A lot of improvement in a lot of areas, which make me feel positive about what we've done. And then we're getting that momentum back. It just feels better than it did in the first 2 quarters. And look, in any business, in any sport steam, momentum's important, right? How it feels inside the building is important because that's going to translate into the level of emotion people are playing with everyday. And it definitely feels better. So I'm confident the things we've been doing have started to turn the momentum back in the right direction. And the things that we started to do before John and Suaad got here to really address some of the weaknesses that we saw as we looked backwards in the way we were creating, really creating demand, the way we were capturing demand, where we were capturing that demand to hand it to Paul's team. We've been looking at a lot of new metrics over the last 8 months and starting to evolve and change that. Having John and Suaad here is going to allow us to accelerate that. So I think it will take less time to make sure we get on the right trajectory than kind of -- than what has taken to date. So I expect that process to accelerate as we move forward. There's nothing that I'm seeing, and we've taken a hard look at the business. We've looked at the markets. We looked at the business. As I've said in my presentation, I really believe that things that are happening today are creating a large opportunity for us, not a smaller opportunity, as long as we do a great job of capturing that demand and then executing against it. And we're improving. It was much better in Q3 than it was in Q1 and Q2. We, obviously, expect it to better again in Q4 based on the outlook that we provided for the fourth quarter. So I feel like we have kind of hit a bit of a lull in the business, and that now we're headed back in the right direction.

Unknown Attendee

[Question Inaudible]

Kevin B. Thompson

Yes, so I actually don't know the exact number. They're in core NPM and core APM. The greatest volume of customers we're going to add always will not be core product customers. Because keep in mind, we had a product strategy, market strategy that says the most important thing is to add new customers quickly, because if we get them in the door, we have thousands of examples, tens of thousands of examples over an initial very small purchase turns into a customer who spent $30,000, $40,000 in license fees with us, $150,000, $300,000, $2 million in license fees with us over time. So the most important thing we can do as a team is to continue to add new customers to the fold because then that gives us a very fertile ground to sell back into. So the ratios tend to be about the same. We've got 60,000 core product customers out of over 150,000 customer. So about 1/3 core product. I don't know what the exact numbers are, but it's going to be somewhere in that range. That about 1/3 of the customers we add are going to be core product customers, 2/3 or maybe a little bit more are going to not be core product customers initially. But we absolutely expect, and we've shown success in getting those guys to buy core products over time. Next question? Anymore? Go ahead Tim.

Tim Klasell - Northland Capital Markets, Research Division

You mentioned that you started looking at some more metrics and different metrics, can you walk us through some of the metrics that maybe became less predictive and what metrics are you looking at now that's helping you capture more of the demand or helping you?

Kevin B. Thompson

Sure. So let me -- I might answer the question a little differently than asked, but I'll give you an example. So one of the things we've been very focused on this year, particularly in the last couple of quarters is conversion rates. Making sure we're maximizing the value of the demand that we're capturing. And so, we've implemented a couple of new cool technologies, and I won't mentioned the vendors because I'm going to -- don't want to help their -- necessarily give them any free marketing today. We kind of implemented some pretty cool new technologies on the BI side that are giving us the ability to give our sales managers conversion rates by rep, by product on a weekly basis. So they can look at every rep that works for them. They can look at every download that came in the door that went to that rep on a by product basis, and they can see how that rep is converting that demand into an opportunity in the pipeline, which ultimately converts into an opportunity that closes. And that's not visibility that we had before because there's no way for us to get at that granular level of detail and definitely no way to get that in the hands of our management team, our sales management team on a weekly basis. Our marketing team is looking at that exact same data. So they're able to look and say, okay across the floor in North America or across the floor in Europe or across the floor in Asia-Pacific, are we seeing certain products and/or certain sources of demand not convert at the rate that we would like them to convert? And then they can also engage with sales management on that. So it's allowing us to do a better job of managing the mix of sources of demand. It's allowing us to do a better job of managing the conversion rate of that demand. We've established targets for conversion rate by product, by geo, by team for all of our managers. And they have to explain now every week when their conversion rates fall below those targets. We didn't have access to that data before. It was sent in the data warehouse where we didn't have the technology that could allow us to get at it fast enough to make it actionable. We could get at it with a couple of weeks of effort and a bunch of spreadsheets and a bunch of guys crunching numbers, but we've now created the ability to get at that information on a weekly basis. It just wasn't something we really needed before. The conversion rates had held pretty consistent for a very long time and had been on -- and had been generally improving. But when you run into a period of time when they're staring to be a little bit inconsistent, then you find ways to look at it in a lot more level of detail. So that's an example of the kind of thing that we've done. And that's not the only thing we've done. But really, our focus has been on, give us better visibility into demand at top of funnel as we're capturing it, how it flows through that funnel, how it comes out the bottom, so we can make sure we're doing a better job of creating more demand or creating that demand with a level of consistency that we can predict what's going to come out in terms of business that we close to me and -- what really matters is what we sell, not what -- not how many people look at our products. It's how many people actually buy our products. Steve, you a question? 2 more questions. I'm now ready to break for lunch.

Unknown Attendee

So I was just wondering in terms of security, is that a future market opportunity where you could get in on that man or sys man, and maybe a security man kind of a product category going and a place where you could flush out more SKUs in the future?

Kevin B. Thompson

Yes, so look, security is definitely an opportunity. I talked about it a little bit in the beginning in that we're definitely seeing a level of complexity in managing security increase. It's not only now about preventing intrusions. It's also about looking, you have to both internally and externally -- it's really about continuous security monitoring. That ability to look at the environment and know what's going at all times, when you've got employees trying to access data they shouldn't have access to, where you're got people that are accessing your network that shouldn't be accessing your network. That's creating opportunity for us. I don't want to be an antivirus player. I don't want to participate in that part of the marketplace, but where I think we can play is in really the intelligent side of security in terms of what is going on with both outside and inside your environment that may impact both performance and also impact your ability to protect your data and keep them from getting in the wrong hands. So as you look at log and event management, it really is the kind of initial foray we've made in security. It's not only a great operational product, but it also is a great sim product. So it has a lot of the features you need to deal with security information in event management. You've seen us do a little bit more positioning around that already. We have a lot of small regional banks that are buying the technology to do that anyway. And so you're going to see us do a little bit more positioning there. And there will be places, we believe, that we can expand in the future, but it's really going to be on the management side. I'm not trying to prevent detection or prevent intrusions. I'm trying to say, when they happen, know what happened, where it happened and stop it quickly. So we're -- and if data's trying to leave the building, we have the ability to do that. So for example, if you've got somebody pulling a bunch of data off of a port on a laptop, we can see them downloading that. And we can actually shut that port off with Log & Event Manager. So it's really more about managing the process and preventing things from happening kind of initially. But once it happens, the ability to shut it down. At least that's today where we are. I think one more question then we'll break for launch.

Unknown Attendee

Kevin, it seems like you're having a lot of success transitioning the N-able business from license to subscription, I was wondering if you would ever consider at a point selling you're core NPM and SAM products on a subscription? There's, obviously, a lot of benefits to the predictability of that revenue and lower cost of acquisition from a customer perspective, and the market seems to really be a rewarding businesses on a subscription basis.

Kevin B. Thompson

So yes, it's a good question. So what I'd say is that the answer is no. But it's not just no, it's a no for a lot of reasons. So one thing keep in mind, we really did blend into our historical SolarWinds business really the best of the license model world, as well as the subscription model world in that we built a pricing model and a revenue model that maximizes the value of a customer with us over time and minimizes the value of the customer to us at the initial license purchase. In that we bill list maintenance, set dollar amount, not a percentage on every maintenance renewal that we do. We almost never discount maintenance unless we've screwed up and we owe you something because we didn't treat you as a customer as well as you should be treated. So every dollar of discount we give reduces the amount of license revenue that we recognize. And we preserve 100% of the value of maintenance revenue. So that's why our maintenance revenue will always grow faster than license revenue even when license revenue is growing fast because every dollar of discount is dropping down into maintenance in terms of what's deferred, and then what's billed in the future. So we really believe we have the best of both already. And then on top of that, we did a bunch of work back in 2006 when I got here. Because at that point we got to select at any pricing model we wanted to select. And in talking to, at that time, about 40,000 IT pros who were customers of SolarWinds, what we learned, and we validated this since, is the technologies that we sell to them. They want to buy with a capital budget because they have access to capital budget very easily.

So for example, if you've got somebody pull a bunch of data off of your portal on a laptop, we can see them downloading that. We can actually shut that port of with log-in of the manager. So it's really more about managing the process than preventing things from happening kind of initially. But once it happens, the ability to shut it down. At least, today, that's where we are. We'll take one more question, then we'll break for lunch.

Unknown Analyst

Kevin, it seems like you're having a lot of success transitioning the enabled business from license to subscription. I was wondering if you would ever consider, at a point, selling your core MPM and SAM products on a subscription basis. There's obviously a lot of benefits to the predictability of that revenue and lower cost acquisition from a customer perspective and the market seems to really be rewarding businesses on a subscription basis.

Kevin B. Thompson

Yes. So that's a good question. What I'd say is that the answer is no. But it's not just no, it's no for a lot of reasons. So one thing, keep in mind, we really did blend into our historical SolarWinds business, really the best of the license model world as well as the subscription model world, in that we built a pricing model and a revenue model that maximizes the value of the customer to us over time. It minimizes the value of the customer to us at the initial license purchase and that we build list maintenance, set a dollar amount, not a percentage on every maintenance renewal that we do. We almost never discount maintenance unless we've screwed up and we owe you something because we didn't treat you as a customer as well as you should be treated. So every dollar of discount we give reduces the amount of license revenue that we recognize and we preserve a 100% of the value of maintenance revenue. So that's why our maintenance revenue will always grow faster than license revenue even when license revenue is growing fast, because every dollar of discount is dropping down into maintenance in terms of what's deferred and then what's built in the future. So we really believe we have the best of both already. And then on top of that, we've had a bunch of work back in 2006 when I got here. Because at that point we could select any pricing model we wanted to select. And in talking to, at that time, about 40,000 IT pros who were customers of SolarWinds, what we learned and we validated this since, is that technologies we sell to them, they want to buy with a capital budget because they have access to capital budget very easily. These guys don't have as much easy access to operating budget. The difference on the MSP market is you're not selling directly to an IT Pro. In the MSP market, the IT pro is the one who finds the technology. The IT pro is the one who tries the technology. But in the MSP world, it tends to be more of a business guy who's making the purchase and they want to match their cash outflow with their cash inflow. And that's where -- why they want to buy in the subscription model. I've got a basic philosophy that you should never sell the same product 2 ways. It's either a licensed product or a subscription product. We will have, and do have, some of both aspects in the future. We'll add more subscription model technology and new products. But all you do is confuse the sales force and you confuse the customer when you offer the same product 2 ways. And you talk about difficulty in predicting the recognized revenue. You may be able to predict sales all day long but it gets a whole lot harder to predict how much revenue you can actually recognize, because you don't know who's going to choose subscription and who's going to choose license when you sell the same product both ways. And the last reason, we're just not getting any demand for that. There's no demand in the marketplace right now at all for our products to be bought on a subscription basis by our buyer. So we're selling directly to that end-user in the mid-market, small business, large enterprise, they are looking to spend capital dollars, because that's what they've got available, that's what they can spend easily.

Okay with that, we're going to take about 10 minutes, grab some lunch, bring them back in, take a bio break. And we'll try to start back up in about 11:45. Okay. Thanks.


Jason Ream

Am I on now? Can everyone hear me, okay? Yes, I now can hear it. Okay, let's get started. Everyone, enjoyed their chicken and broccoli or whatever it is they serve at hotel functions like this?

I want to kick this off and one, first, say hello to everyone. I know a lot of you in the room, if I don't know you by face, I'm sure we've talked on the phone back in my earlier days when I was involved in Investor Relations. I did not set out to try to hold the most number of jobs at SolarWinds out of our total employee base, but I think I'll claim that I did, because I think right now I'm winning that contest.

I joined the company to do corporate development, mergers and acquisitions. Literally, as I was -- I think I sent back maybe my first employment agreement and signed it and Kevin said actually, hold on, as you know, we're about to go public, since I was one of the bankers taking us public, we need somebody to do IR. So you can take that on as well. Thankfully, we hired Dave who's much better at it than I ever was and I'm sure all of you appreciate that.

So I did that. I oversaw several acquisitions and the integrations that we did, of those, I briefly managed at least by proxy a sales team when we acquired TriGeo. I've managed that team largely for a quarter with a lot of direct involvement and coaching from Paul. But that's what produced some of my gray hair, being involved in that sales process. I did some marketing on the products side for a while and I'm very happy not to be involved with that anymore, but it was a great experience to get deep into the products.

And I've come now today, before you as the CFO. I'll also say that I didn't necessarily set off to be CFO. When I started at SolarWinds. I had just come out of 10 years in investment banking and finance, and I thought a nice break from finance would be great, do something else. I am super excited to come back now in front of you to be in this role because the experience I've had throughout the rest of the organization has given me a deep appreciation of what it is that we do, what it is that our customers want, how we're different from everything else out there in the market, and I think where we need to put our focus as a company to really be successful. And I think, Kevin obviously is our leader and drives a lot of that.

I am excited to be his partner in directing the finance and investment side of that, to really match the company and strategy objectives that we have. And I'm a bit of a different CFO, certainly than Mike Berry was before me. I have the luxury of having a fantastic partner, Bart Kalsu, who runs the accounting side of the business, so I'm able to focus really on the investments and strategy side and partnership with Kevin and Paul and John and Suaad the rest of the team.

So let me give you that preamble. We're still going to go through a lot of the normal things that you see in a finance presentation. Although instead of just calling it finance, we're calling it financial strategy. And of course, we will talk about outlook as well.

All right. With that, I want to talk about some of the key important themes that we think about as a team when we think about running this business from a financial perspective.

The first is that we have, and you've heard this several times today, we have a philosophy and a strategy around maximizing lifetime value of a customer, right. That manifests in several different ways. We'll, actually, I have us a whole slide on it, we'll get to that next. But second, we have a focus on recurring revenue. It's been a focus for a long time and it's tightly connected to this idea of lifetime value of a customer. We want to build a relationship with the customer that is not based on initial sale or initial technology delivered but the value that we deliver over time.

The right way to reflect that financially, so we are incented to do the right things in our operating strategy, is to have a recurring revenue focus. We've had that from day 1, even in our license and perpetual license and maintenance model. But obviously, as we add subscription technologies and businesses that are focused on delivering technology from a cloud, those will obviously be subscription as well, that focus is increasing.

We also have inherent leverage in the model. Now of course, as I say this, I am conscious that we have taken down margins in the last couple of quarters, but I think I am very confident, I think, probably most of you are confident as well, that we do have inherent leverage in this model. When Kevin -- or yes, when Kevin was talking about bunnies enterprise sales people being bunnies where they multiply. They eat all the grass we were sort of joking they also leave a lot of other stuff around, rabbits tend to do. We're not having any of those rabbits in our business, which would potentially remove some of the inherent leverage in our model, right.

We also don't do the customization that typical large enterprise software companies do, which removes that inherent leverage, right. We may change our investment profile from time to time, but the inherent leverage is still there. And that is the context within which we are investing at this point, at a bit of a higher rate than we have in the past to seize the opportunity.

So let's talk about maximizing the lifetime value of the customers.

The first 3 steps on this are really actually not at all about maximizing lifetime value of the customers, right. The first 3 steps are about solving a customer's point of pain when they have that point of pain and when they come to us to solve that point of pain, right? Our model is designed and our products are built so that we can sell the particular problem. So Kevin went through all the different admins that we serve now, network admins, server admins, storage admins, database admins, security admins. We want to be able to solve their point of pain with an individual product at the size that they need, and we want to make that a profitable transaction on its own, right. And I think we have been able to do that very successfully for most, if not all, of our products, throughout our history.

We then want that product to be -- Kevin used the word excite, I like to use the word remarkable, right. We want that product and the experience of dealing with SolarWinds and the experience of using that product to be so remarkable that, that customer becomes: one, a loyal fan of ours and will come back and buy more, but I'll get to that in a second; but two, and this is super important, so that they become an advocate of SolarWinds in the market.

If you look at the history of SolarWinds and what has driven a significant portion of our growth is massive word-of-mouth awareness of SolarWinds and word-of-mouth reputations from one IT Pro to another saying, "Hey, this product is great, it solves my problem. It's easy to use and it's incredibly affordable, why don't you try it, too?" All right. Look at the early days of SolarWinds when we had -- went from a very small revenue number to well over $100 million, there was not a whole lot of traditional marketing happening because that word-of-mouth was what's really sustaining us and driving that awareness and interaction with the company.

We also want to make them happy, right? And happy is a very light word here, because it's so -- it's a kind of emotional response we want from our customers. We want them to be happy, but it's more than simply just happy. We want them to be receiving value from SolarWinds beyond simply that initial purchase. We want them to have a product which continues to solve their needs, a product which gets updated for new technologies and new trends that happen in the market. So that not only did it solve their initial point of pain but that we continue to give them value over time that solves additional points of pain along the way and keeps them ahead of performance in their environment, makes them look smart in front of their boss. And frankly keeps their budget under control.

The result of that strategy, though, is the upside which is that if we make our customers happy, we solve their problem in a valuable way and we add additional opportunities and additional technologies which give them opportunity to buy more from us. We want to drive cross-sell, upsell, an additional value from that customer for us, for SolarWinds. All right. That is our lifetime value. Get in, in a very clean, positive way for us and for the customer. Make that a profitable sale, but then drive more sales over time, right. That has been our strategy since I got here, since Kevin got here, in terms of initially, we started with network management, right. But we've added products to the portfolio to create a broader solution which we can cross-sell to customers.

The important difference here, and I'm sure you've heard that line from multiple software companies over a course of your career, companies that talk about land and expand strategy. Our difference, our key difference, though, is that initial transaction, that land transaction, is also enough for us, right. Because we can serve the entire market, because there are millions of potential IT buyers for us in the world, that initial transaction is a profitable one and we have enough of those that we can do where we can create a phenomenal business simply out of those. Of course, we don't rest on our laurels, we want to additionally drive that upsell and that lifetime value.

I want to give you some examples. So we did an analysis recently of our largest customers. We picked a number, $150,000 that they spent with us and that's in license transactions. Just about every other company we talk to would say, okay, I've got 408 customers who spent over $150,000 with us. They're probably buying $50,000, $100,000, $200,000, at a time, right. That, for us, I'm going to actually go through this entire slide, those customers have, on average, done 33 separate transactions with us at an average transaction size of $109,000 right. Which is, quite frankly, pretty astounding that we have in our very largest customers.

Now do we have some six-figure deals in there? Yes. Do we have any seven-figure deals? No. There are few six-figure deals but even if you look at our largest customer, our largest customer has spent, in this list, there's a commercial customer, so excluding with that, our largest customer has spent, I think, over $1.5 million with us, over the course of 230 transactions well over 10 years, right. Their average transaction size is under $8,000, right. And that's our largest customer.

So this model that we've built make the initial sale, one that is easy, one that is profitable but create lots of reasons for that customer to come back to us and buy more over time. That model is working, right? We're driving incredibly attractive relationships with one of our largest customers still within that very same model, right.

Even if you look at our top 100 customers out of this group, so that's our top 100 customers by revenue, the average transaction size still -- is actually 8,400 for that largest 100 customers, and they've done an average of 69 transactions with us, right. Pretty incredible stats. Different than, quite frankly, I would say all of us would've expected something like this. Until we saw this analysis, though, we didn't know that was actually the case right. But when you look at these top customers, the strategy and the model are playing out with them.

The other way to look at our lifetime value strategy is look at penetration of products per customer. So those top 100 are the top 100, top 400 customers that are doing lots of transactions with us, some of those transactions, for sure, are additional deployments of our products. So for example I think that our -- the #1 customer on that list had over 70 instances of NPM, network performance monitor. So they bought initially, one instance of NPM. They came back and bought more and more and more of that product. Sometimes it was expanding the size of one particular instance. Sometimes it was adding instances for additional locations or for additional teams. But we also -- and this is a core part of our strategy of adding products through acquisition and through development, our strategy is also to increase the number of products that each customer owns.

Regardless of the size of the deployment of each product, we want to add products to their portfolio from ours. So this chart here is looking at the number of products based on the age of the customer. And this is a snapshot today, right. So you look at our customers who have been with us for 1 year or less, 2.5 products, right. It makes sense. You get customers come in and you buy 1 product, solve a point of pain. Sometimes you get customers who come in and buy 2 or 3 products because they see -- they're solving a problem that kind of falls in between those 2 products and -- or those 3 products. And together, they address the customer's need.

But what we're seeing over time, the longer customers stay with us, the more products they end up buying with us, from us, right.

If you're to look at the snapshot today versus 1 year ago, versus 2 years ago, versus 3 years ago, these numbers would come down as you look farther back, right. Obviously a reflection of the products that we've added. So we've added more opportunities more options for the customers to expand their purchase with us but also a reflection of the efforts we've made.

Now are we satisfied with this? Absolutely not, right. And we will continue to talk about this. It's not something we'll disclose every quarter, but I think we'll talk about it next analyst day. We'll talk about it the year after that. We want this -- I actually don't want every single bar on this chart to go up, right. I like the 1 year number to stay relatively low, right. If we came back to you 3 years from now, and this 1-year-- the first year customers were buying an average of 6 products in their first year, we might be putting a pretty heavy emphasis on that first transaction and saying, "You've got to buy everything, everything we offer." We don't want to do that.

Again, we want to make that first transaction easy for the customer, affordable and profitable for us. But what I do want to see is the right side of that chart for our customers who've been here for 4 years, we want that number to go up pretty significantly. We have 29 products, 20 core products. We believe that most of our core customers should own a significant number of our core products.

Enable is a new piece of the business. Most of you have followed it. It's obviously performed very well, serving a bit of a different market with a bit of a different solution. They're selling to the MSPs and they're selling it on a SaaS basis. In most cases, on a subscription basis, in almost all cases now. But they're essentially following the same strategy. They're trying to bring customers in, make that a valuable transaction for us and for the customer, and then they're expanding that customer overtime with additional products, but also additional deployment. Now they're selling to MSPs, who are turning around and providing a service to small businesses. And so as their businesses grow, it's not that their own networks have to grow. For most of our customers their own IT infrastructures have to go. For the MSP customer base, their businesses grow, they manage more small businesses, they buy more technology from us. So essentially the same strategy.

What has that all resulted in? A higher and higher percentage of recurring revenue. So we have built this model to drive more recurring revenue over time. Now look back at our early days, 2008, 2009, 2010. We had very fast license growth at that time and yet drove pretty outstanding amount of maintenance revenue relative to your typical software model. That is because we carved a higher percentage of an initial deal towards maintenance, recognize less in license in the initial sale

We also have a tremendous amount of focus on maintaining that relationship with the customer overtime. So I think we do it -- I would argue as good a job as any, maybe better job than most, if not all. A bit of a bold statement, but we're doing an incredible job of renewing our maintenance agreements.

So I actually -- so I set up, and you saw now in the office that we're building up there. I went up there before I was here, so -- to open that office, and I've stayed up there. I spend a lot of time on the plane now, but I stayed up there. So I have an entire maintenance renewal team that sits outside of my office. I love having them outside of our office -- my office because they are passionate about what they do, they seem to have great conversations with their -- with the customers. They're helpful, and yet they get the job done, right?

The 90 -- mid-90s plus retention rates that we've talked about, we are very good at this. Not simply because those guys are passionate about their jobs and about what they do, and that's a focus for us as a management team, but also because of the technology strategy that we have, which is to frequently release products, provide additional value so the customer sees value in that maintenance, right?

So even early on, when we are a pure license -- perpetual license and maintenance model, we have a very high proportion of recurring revenue, right? Now over 2013, as our license growth has slowed more than we wanted to, right, we still have obviously seen benefit from our maintenance model, but we have also added subscription, right? Kevin talked about the fact that we don't necessarily see demand nor even a reason, for that matter, to have a subscription SaaS-based model for the traditional IT management market.

As we look at new markets, MSP is one, there are others out there that we're not in yet but that we're looking at where we will see greater benefit, where the customer will see greater benefit in using a subscription-based SaaS model. That will drive additional recurring revenue, but it just adds to our focus that we've had even on our classic perpetual maintenance model.

So obviously, 2013 has seen the mix focus even more on recurring. As we go forward into 2014 and beyond, we want to keep that focus on recurring. Part of it will be through adding subscription, but it will continue also to be driven at this foundation by a fundamental focus on the lifetime value, what we're providing over time, which -- the financial relationship of the customer has to reflect the value relationship as well. We're delivering value through technology over time to support over time through additional products. And the integration over time, we want to see that back in our financial reward over time, and that's what we've built.

That, also, of course, in addition to simply reflecting the relationship that we have, has a benefit for us, right? Recurring revenue has grown more consistently even in periods where we have to grow license and SaaS if we want to. It still has provided consistent growth on the recurring side. It also is more visible. So we generally have relatively good visibility into our maintenance stream, and we believe we will have relatively good visibility into our subscription stream as well.

It also has inherent leverage, right? Of course, on the subscription side, you have a ramp in profitability over the course of that relationship since you're deferring over cash. But it has inherent leverage, right? When you hook a customer onto a subscription, whether it's pure subscription or whether it's the maintenance form of subscription, there's inherent leverage in that model and provides profitability for us to fund a lot of the rest of the business. It also results in strong total revenue growth, right?

Now we all know we wanted license to grow much faster than it has grown in the first 3 quarters of this year. But because of our focus on recurring revenue, we have had flexibility to continue to fund the business, to continue to make the investments we want to make because our overall revenue growth has continued to be strong, again, funded by that recurring revenue.

So let's segue now into metrics. And when Mike joined the company, Mike Berry joined the company 3 or 4 years ago, he took the opportunity at that point to take a look at the metrics we have been disclosing, which were a bit scattershot at that time. And we said what we wanted to disclose as our key metrics for all of you in our quarterly earnings calls and in meetings like this. I think those were good decisions at that time, but the business had changed a bit since then. So I'm taking this opportunity to reset and say, what are the metrics that we want you to focus on at this point? Quite frankly, that's driven by what metrics do we focus on, and we're going to commit to you to disclose these.

There are some of these, as I go through, that will give you what I would call a pulse or a speedometer reading on how the business is doing. And I think that's important for all of you to know, okay, especially when you talk about the core, especially when you talk about the commercial market. The strategic part of our business is really going to drive our long-term growth where our long-term opportunity comes from. We want you to have a speedometer or headlights into what's going on there.

There are other parts in here, which I would call -- I would say are slightly different. So every week, not every quarter, not every year, every week, each member of Paul's management team, from the manager level up to the SVP level, has a commitment. They have to commit what they are going to sell that week, right? They all love it. It causes a bit of stress the night before, but I think honestly, they like that excitement.

But this is our commitment to you. There are some things on this chart that aren't always going to break our way, right? But they -- because they are important strategic focuses for us, we are going to give you a visibility into how we are doing on the most strategic initiatives. So as I go through each of these, I will talk about which one falls into which category. But I'm also -- as you may know, I'm going to give you some new information here that you haven't seen before, so I hope everyone's excited because I know you all love metrics.

So this is a highly readable chart. I'm sure even for the guys over there at that table who are sitting right in front of screen, squinting, right? So these are the products that we have today, right? We have talked in the past about core products and about tools. We've talked about network management products. We've talked about system management products, and of course, we've talked about our new MSP business, right?

I want to lay this out very distinctly, this is what we are looking at when we talk about those different groups, right? We're looking at network management, a set of products, which Steve actually does include OM product, which has a security focus. But those are our network products. We've got a set of systems management products headed by SolarWinds Server & Application Monitor and the associated products to go with that, for IT pros that are largely focused on the system side of the world, servers, storage, et cetera. And then we've got our MSP products.

Now there is a split here between core and tools, right? I don't want to belabor the point because I know Kevin's talked about it already today and probably to most of you a number of times before. But there is a difference for us between tools and core, right? Tools are very important for the business, right? Some of these have been acquisitions. In fact, a number of them have, and they serve very important purposes, right?

So I'll take an example. DameWare is a product that we bought, not for strategic revenue growth but rather to give us brand within that systems management market, to which we were relatively new back in December 2011 when we bought DameWare. That's a long-standing brand within the world of people who manage servers and manage desktops. We wanted to get some instant credibility in that market by associating ourselves with a brand that they knew for a long time, right? They knew the SolarWinds brand because we're a bigger brand than DameWare, even for those individuals. But for them, they had an association in their minds between SolarWinds and network, and we want to create a connection between SolarWinds and systems.

Each of those products has a function. A lot of them also serve the function of bringing people onto the SolarWinds family through a relatively low commitment, at least low dollar commitment experience, where they can start to get familiar with our brand, our technology. Even if it's not solving a major problem for them, it's solving some point of pain. But that gives us an opportunity to better capture that demand when they do have a major point of pain that one of our core products solves.

Now our core products that are listed here, most of them no surprise, NPM, SAM, NTA, NCM, a lot of the products you've heard about for years. But I want to give you a view of how we've included -- how we've made this split, right? What we do is looked at a variety of factors and tried to give an average weighting across those factors as to what -- I'm not going to give you -- we, of course, had a view instantaneously of what we thought was core and noncore. But we also put the rigger behind and say, there's a mixture of factors here. Is it a server-based product, right? Or is it a laptop-based product? Is it something that an entire team uses to manage the IT infrastructure and manage the performance of that infrastructure? Or is it something that solves a discrete point of pain that's not managing overall infrastructure? And then what is average selling price of that product? Is it $3,000, $4,000, $5,000, $8,000? Or is it $500 to $1,000, right?

When you look at the confluence of those factors, these products split pretty cleanly. In fact, the almost -- just about everyone split exactly on each of those lines, but certainly, 2, if not all 3. So we've separated those out. This is for reference because I want everyone to know, as we disclose things in the future, what are we putting in core, what are we putting in tools, what are we putting in network management, what are we putting in systems management?

Now here's a new metric for you that we have not disclosed before, total revenue by product group, right? Network management has been our historical business. No surprise, this is the largest piece of our total revenue. They have a large maintenance base there, which we've been building over the course of 15 years. But you also have a large license stream as well, which results in a total revenue that is the -- still the majority of the total business.

The growth in that business has not been what we've wanted. We have vastly more market opportunities than what is reflected in that growth rate. Part of that has been execution challenges in the first couple of quarters this year. We saw the growth rate in that business pick up in commercial during the third quarter, and you can see a bit of a bump there in the total revenue from Q2 to Q3.

Systems management is something we have highlighted as being a higher-growth business for us. The growth rate has been in the 20% and 30% year-over-year range and even higher than that for some prior quarters. That, of course, does include products like DameWare, right? DameWare is one of our tools, has -- as I've mentioned, serves a function for us. It's included in that number, and it perhaps is muting -- it is muting the growth of some of our other products in 2013. But again, we want to give you a full portfolio view there of the different parts of our business.

And why is this important for us? It's important for us because we do look at these products as groups, as a management team, right? There are different tenures for these products within our organization, right, different levels of brand awareness within the market for SolarWinds being associated with these types of technologies in these types of markets and different levels of cross-selling ability between penetration of our core products and ability to add other products from that side of the product group to a customer that we already have. So we do look at these 2 separate breakouts and want to give you a view into how they're performing.

Our goal, of course, is to make all of these grow, right? We want network management to continue to grow. We want it to grow more rapidly than it has. Systems management is something that has been providing growth. We want to accelerate that as well. We obviously want to create connections within our customer base between those 2 different sets of problem. But we'll continue to look at them separately as well because they do have, in some cases, different buying personas even at the same customer, but they also have different market reputation, market brand, market credibility criteria.

The last piece, of course, is the MSP business that was added in Q2 of this year through the acquisition of N-able, grew rapidly quarter-over-quarter. Obviously, this is not a valid comparison put on this chart because we only had it for a portion of Q2, but it has been growing very rapidly.

This is one of those metrics by which we run the business. We expect you to watch this as a speedometer or headlights into how we're doing. We also have talked about, in the past, commercial license transaction growth and commercial license transaction size. So our commercial license business is the fuel for the traditional SolarWinds license business, right? The -- yes, traditional IT management products at SolarWinds has to be fueled by our license business, right?

We've built the model so that recurring revenue is an important focus for us, so that recurring revenue provides benefit for us in terms of visibility and in terms of profitability. We fuel that through our license sales, so that's something we watch carefully. Obviously, we know you watch very carefully as well, right?

Now we're not disclosing total as a regular metric, total license transaction volume. And the reason for that is that Fed can buy in very different ways. The government organizations can buy all at once, even though it's lots of transactions aggregated together. Or they can buy in very small transactions. Quite frankly, this is less even a question of whether or not that skews our results as more of a question of, where is our strategic growth over the long term?

Our strategic growth comes from the commercial market. If that business is performing well and transaction volumes are growing, if average transaction sizes are steady, that is a very good indication to you that we're on a very healthy track, right? So we have seen strong growth in transaction volume, built a little higher at the beginning of this year. Quite frankly, that was due to a variety of factors, right?

We acquired several products last year which had lower transaction sizes. Even though they're in the core group, they had lower transaction sizes relative to the mix, and that skewed our transaction volume up a bit. We also made some sales structure changes, call them experiments, early in the year to try and focus salespeople on individual products. Resulted in outstanding volume for those particular individual products, brought down our overall average transaction size and brought down our overall license growth in a way that we didn't like. So we've addressed that.

Part of the -- the other flip side of this coin is average transaction size, right? For us to grow that core commercial business, we've got to have transaction volume, and we've got to have transaction size in a predicable range. Now we've talked about this before. We do not have a long-term goal of growing our average transaction size, right? That is an outcome of what behaviors our sales force is engaged in, how we have structured them, what products they have to sell in their particular group, how they attach to those products, et cetera.

It is not necessarily our goal to make that a $10,000, $12,000, $15,000, $20,000 average transaction size. Quite frankly, I'm not going to pick a number, but there's probably a number we could get to where we would say, okay, we have taken too much of the ease of buying out of our motion and out of the experience with a customer, right? We want that transaction size to remain relatively constant, relatively stable, one, so that we know how exactly how our transaction volume will affect our results, but two, we want that to be -- again, that initial transaction has to be easy for the customer, profitable for us.

And this is the sort of range -- we're coming back into the range where we feel very comfortable, right? A lot of the changes we've made on the sales side, a lot of the changes in quality we've driven on the marketing side and we're beginning to drive and will continue to drive have improved what's coming in and are resulting in better transaction sizes. So this is something that we will continue to give you as a good speedometer, a good pulse on how our business is moving.

We also talked about total revenue by geography, right? Now I would call this a commit. This our commit to you, right? We have said that this is a strategic priority for us to grow our international business, right? There is too much opportunity internationally that we are leaving on the table. We always want to drive and pass the growth out of our North American business, right? There is no reason to leave that opportunity and focus on something else to the exclusion of North America, right? That is a big opportunity. It's where our brand historically the strongest. There's probably the highest affinity to buy in the way that we sell.

But there is a massive opportunity that we're leaving on the table internationally, right? And quite frankly, as Kevin said, we have not done as good of a job as we promised to do in growing that international piece, right? We started off at the end of 2012 with a renewed focus on international did an excellent job in Europe, did an excellent job in Asia Pacific in growing that business internationally, had some execution challenges this year. And that's not where it should be, right? So we will continue to show this chart. We expect that number to go up. That's part of our strategy, and so we'll let you hold us to it.

And lastly, I will talk about this license. Paul has talked about it already. This again -- remember, this is not a chart depicting sales to our installed base. This is a chart depicting the results of our installed base sales team, right? There are many customers who come in -- existing customers who come into our process for the download. One of the reps who is not on the installed base team captures that download and closes that sale.

But we have made this a strategic priority to grow this team because the opportunity is big, because in what we call the gobstopper chart, they are the -- that was the circles that built up. Because an opportunity is so large and because, as Kevin always says -- and Paul tries to manage his expectations here, but as Kevin always says, those are the easiest sales we will ever make, right? Those are -- people -- customers who own one of our core products, who undoubtedly -- and this has been said, talk to IT people out there who own our products. They are undoubtedly satisfied with our products. That is the easiest sale we will make. We would be remiss if we didn't continue to invest in that effort to proactively drive that installed base cross-sale upsell activity, right? So we will -- we'll let you hold this to us as well -- hold us to this as well.

All right, should skip this part? Anyone want to hear it? Okay, so we'll talk about this as well. All right, I'm going to talk about our outlook in a slightly different way. I want to build up to this and give you the thinking behind what we have put together here and how we came to the result that we did. So first, I want to talk about sources of revenue and sources of growth in 2014, right?

Starts with our deferred revenue. So because we have built this recurring revenue model, not only with N-able and its subscription stream but with SolarWinds and its maintenance bookings, we have a stream of revenue which will come in 2014 from deferred revenue from the balance sheet, right? Largely unreal, we can predict that pretty accurately, very accurately. But I want to remind everyone that, that deferred revenue stream has been negatively impacted by the level of license bookings we had in -- or have had so far in 2013, right?

So maintenance has historically grown significantly faster than license in our model, but it also is a trailing phenomenon, right? So the impact, while we've had very strong maintenance growth this year in 2013, that's largely driven off of 2012 new license bookings. We won't see the impact of 2013 bookings until 2014.

Second source is from renewals that we do in 2014, right? And we have a very large maintenance space from 15 years of selling to customers. We have a very strong focus, a very high-level focus and a very deep focus on renewing that maintenance, not only through the act of renewal but through the value that we deliver to the customers to cause them to renew, right?

So we have a stream of business that is up for renewal in 2014, not to mention in Q4, that we will go out to renew. We expect to do it at our historical rates or in our model, we put it at lower rates than historical just to be conservative. We have a stream of revenue that will come from our past maintenance bookings. Now again, I want to remind you that this will also be impacted by 2013 license levels, which where we wanted them to be, right?

So as you look at your models, you got to expect maintenance revenue growth to come down in 2014 despite the fact that we're very optimistic about our new license sales going forward, right? We simply have to work through -- from a trailing perspective, we have to work through the impact of our 2013 license.

We also have subscription renewals, right? Now subscription renewals are a slightly different phenomenon. They're growing off of a ramping subscription base in 2013. N-able, prior to the acquisition, sold a mixture of perpetual licenses as well as subscription. They did exactly what Kevin said he does not like to do, which is give the customer the choice. But they're a private company that had lots of different objectives they were trying to satisfy.

We have transitioned that largely to subscription only. Particularly for new customers, really, their only option at this point is subscription. So we are ramping off a smaller base there, so we have a renewal opportunity. We feel very confident that, that team is doing well but also that we can improve the rate in which they renew their subscriptions. So we've got a base to work from there.

We also have new license that we will book in 2014, all right? This will obviously be a large component of the 2014 revenue. The renewals, the deferred, it's highly predictable. We can -- it could tell you pretty much exactly when it's going to come out. The new license is something we're very excited about, will drive growth in 2014. And it is improving off of, frankly, hate to say it, but easier compares this year than we had in the past.

But it's also fueled by investments that we're making in the business now, right? We're not satisfied with the level of license growth we've had this year, and we are -- don't want to leave the opportunity that we see on touch. And so we're investing to go after that opportunity and to deliver the fuel for the rest of the business.

Also, we've added Confio, right? That was an acquisition in the perpetual license and maintenance model that will add new license sales next year as well.

Now there are couple of smaller pieces. I'll go to both at once, new maintenance and new subscription. We feel very confident that new maintenance, of course, will tie directly to our new license sales. And all of our license sales, we include from the customers' prospective maintenance in that. We carve it separately from an accounting perspective and recognize that separately. But we will have new maintenance bookings in 2014. We're also very excited about our new subscription bookings from N-able, from our MSP business. Both of those will drive some 2014 revenue, but we'll -- primarily, we'll see the benefit of those in 2015.

So our assumptions. I want to give you a view by product group. So network management. The largest piece of our business. We are assuming an acceleration in the rate of new license bookings in that business, right? We've seen the turnaround. We are excited about the changes that we've made in our marketing organization, the changes that we've made in our sales structure and the level of investment that we're making in the business, that we will drive an acceleration in new license bookings in the network management group in 2014.

Now that -- also, that group has a very large proportion of maintenance revenue because maintenance revenue has a trailing effect. Because the bookings in 2013 have an impact on the rate of growth in 2014, that business will have a bit of a conflicting effect from the new license side and from the trailing maintenance side. And so we're expecting approximately 10% plus growth to that business in overall total revenue because of the maintenance effects from 2013.

In the systems & application management business, consistent with past levels of growth, we're expecting growth in the 30% to 40% range for total revenue for that business. Now that business has a smaller mix of maintenance base relative to the network management business. And so obviously, there will be an acceleration in new license sales in that business as well baked into our assumptions. Not a massive one, fairly consistent with what we've seen, but the overall growth there, because that is less of a -- less focused on the recurring revenue, I think the new license sales -- we believe the new license sales will have a relatively large effect there, and we'll see 30% to 40% growth.

And then the last piece is our MSP business, right? This business has been growing fantastically. We expect 100% growth plus in 2014 relative to 2013. Now I want to caution you, those are not apples-to-apples comparison for that MSP business because we've only owned it or will have owned it for 7.5 months of 2013.

Now I will say, though, even if you look at it second half-to-second half, what we expect is that it will still be the fastest-growing component of our business. Subscription will be one of the fastest-growing components of our business, slightly above where the systems & app management business is growing overall.

Now when we talk about the investment side, so we talked about a lot about the different things we're doing in the business. We've also provided you guidance for Q4 of this year, which shows increase in investment. But there are number of different areas where we're putting our focus as a team. And obviously, a lot of that results in dollars as well, although it's not a one-to-one correlation.

On the marketing side, I think it -- Kevin used the phrase, the best marketing you will ever get is a viral word-of-mouth marketing amongst IT pros, right? That has been one of the primary drivers of our business throughout our history. As we expand the solution that we deliver -- so we talked about not only solving individual points of pain but connecting those points of pain together, connecting the products together -- we're solving a broader problem for more numbers of users in a new way that we haven't done for.

We don't want to wait x number of years for that awareness about our new capabilities to get out in the market. So we want to proactively accelerate that timeframe, get the awareness out there, get the IT pros throughout the world to know that we do that, know that we're a place they can come.

John also talked about an emotional brand connection with customers. We want SolarWinds to be a place where IT pros come first, right, where they say, okay, there are a lot of places I can get technology. SolarWinds has the best technology. But even aside the technology and even aside the price that I get it at from them, we want them to have an experience that says, why would I buy it anywhere else? Because it's just better to deal with SolarWinds, right?

So we want to invest in that brand, create that connection with the customers and potential customers. We're also investing in conversion. We're investing in automation. We're investing in those few things that drive further predictability along the path we've already started, driving more visibility, more predictability, more consistency in our demand generation.

We want to continue to invest in that because that is, for us, unlike a lot of other software companies where it's an art, right? And sometimes the art does right. Sometimes it doesn't. For us, it's an engine, right? We need that consistency, that predictability. That is better for us than even while volatile swings to the upside, we want the consistency of predictability. So we're investing in that non-marketing side.

We're in also investing community proactively again, right? We want -- our community has done well for, has been a source of strength. You talk to our existing customers. In fact, if you do the exercise and call IT pros, ask them what they think of our community, right? Because they find proactive valuable resource, all right?

Now as John talked about, we also want to bring that to the front of the cycle as well, make that a valuable resource from prospects and, quite frankly, for us as well as we move through the funnel with our prospects to our customer. And then again, we're investing not only on the new customer side but on the installed base opportunity within marketing.

On the product side, we're doing the usual. We're doing the ABCs of SolarWinds product development, which is to continue to release new features, new technology, address new challenges for our existing customers. That is part and parcel of our life and value strategy, is that we want to solve problems of customers, even new problems that emerge, so that they have a reason to continue their relationship with us and continue to renew their maintenance contracts and financially benefit us.

We are also working very hard on creating integration between our products. Kevin talked about SolarWinds Storage Manager, SolarWinds Virtualization Manager coming onto the Orion platform, the unstructured data search on the Orion platform, again, as a way of creating integration between different products so that we can solve interconnected problems that multiple-point products can't solve, right?

So take 2 best-of-breed products from 2 point product vendors, you may have visibility in the different parts of the infrastructure. We want to create a "1 plus 1 equals 3" scenario where you can use our combined products together. Either one solves your problem on its own at an affordable price point, remarkable and delightful to the customer. But you put them together to solve a new problem that the customer couldn't solve before.

So we're investing heavily in the integration of our products from a user experience and from a technology linkage standpoint. And then we're investing to use the products to help drive our installed base. Show customers in the product what it is that they could be doing with other products that we offer. Not a hard sell, an easy show to the customer, which is one of the ways that they like to be interacting with. Show them the other things or the other problems that we can solve for them in the product itself.

On the MSP side, we're investing in integration between SolarWinds' other products and the MSP products. One obvious point is Web Help Desk ticketing solution. That's one of the classic things that an MSP managing a bunch of different customers' environments needs to do, actively manage the issues that they're trying to solve. We're also investing simply to manage the scale of that business, right? It is growing rapidly from a customer standpoint, from a devices managed standpoint. A little less rapidly from a people standpoint, but it's growing there as well. And so we're investing to manage that growth.

And then from a G&A side, we have talked about the analytics and the metrics that we watched. Kevin talked about the fact that we now can look at pipeline growth and pipeline creation by product, by team, by rep, by manager, et cetera. We're investing to give us ourselves more headlights into what is going on in the business and to automate that, push it out, make it incredibly useful and usable by all of our teams.

We're also investing in global infrastructure, right? We have built out -- we have opened an office in Utah. We have new offices that we have acquired through acquisition. We're -- built out an office in the Philippines where we're staffing certain functions. And we're trying to make that as seamless as possible. The thing we've always said is other companies try to globalize offshore, et cetera, to get cost benefits. We want to get productivity benefits first, cost benefits as a bonus, right?

And so we're investing that. We're reaching a scale where we're starting to get a lot of synergies between having different locations. Part of it is what was mentioned before about a wider diversified pool of talent to recruit from. Now that we have multiple locations in the U.S., multiple locations around the world, we have a lot of different places where we can recruit talent.

We also get a schedule benefit by having, for example, support in different locations around the world. We get a schedule benefit by having development in different locations around the world, in the Eastern Europe, in India, in the U.S. So we can essentially be working around the clock on products, solve problems much more quickly than even a super highly paid dedicated team located in one place could do because we get that benefit of an entire team working on a cycle together.

So we're investing in our global infrastructure to position ourselves for the next phase of growth. Part of that, could we hang on in just a few locations for a little while longer? Potentially, right? Where do get to the next phase? Kevin talks about 1 is just a step to get to 2 and to 3 and beyond. We need to invest to fund that scenario at this point.

That's where our investment focus is going. I want to talk about how you should think about the operating expense growth in 2014. I want to explain what's going to come up on this slide. This is a view breaking down the dollars of growth, incremental dollars from our operating expense spend in 2013 to our operating expense spend in 2014. Where are those incremental dollars going?

The largest chunk is going to our MSP business, right? Now part of that is a year-over-year compare, right? We're going to have it for 12 months in 2014, only 7.5 months in 2013. We also have a lower profitability structure than we do at this point. We're improving that every quarter, every month, every week. But they have a lower -- a higher expense burden than we do relative to the sale, and so part of our operating expense growth is going to the -- our MSP business.

We're also, as we've talked about, ramping our investment in classic SolarWinds sales and marketing, right? A lot of that investment came online during Q3, right? We hired to the capacity we wanted to be at in Q3 and sales. We will not let that -- our goal, our expectations not let that capacity slip. We want to continue to invest in the right places in that organization.

We're also investing in marketing, all right? And talked about the things that we're doing. Again, fueling -- sorry, accelerating, proactively accelerating the natural phenomena that are out in the market, the word of mouth, the oil fan base. Proactively accelerating that to talk about the new product areas that we're in, the new markets that we're in, the new problems that we solve, but also the connected vision that will benefit a lot of our customers.

Confio, the acquisition we did earlier in October. Obviously, we'll only have 1 quarter of expense from Confio in 2013. We'll have 4 in 2014, and so that is a meaningful piece of the year-over-year change in operating expenses. Expect that to be a really -- a one-time effect from Confio. We'll largely integrate that during 2014, and that will be a seamless part of the overall SolarWinds business. But it does have an impact in our year-over-year change. We're investing, of course. We've always been investing at a relatively higher rate in our products, both development of new features as well as the integration development that we're doing, but we're upping that investment in 2014. Part of that has happened already in the third quarter of this year, in the fourth quarter of this year as part of our outlook, and so you see it an impact in 2014 as that level continues. Don't expect that to be the biggest piece, but it will be a piece. And then as I said, fueling our global infrastructure growth will be a piece of our operating expense growth as well.

So what does that all add up to? We currently expect total revenue growth in 2014 of 20% to 25% versus 2013. Now, as I said, that will be a mixture of accelerating license growth relative to the performance we've had this year. We've seen that began to pick up and positive signs in Q3. We're excited about the investments we've made, the changes we've made. The maintenance growth will not be as strong as it has been in the past. Right? We do not expect maintenance growth to be at the levels it has been in 2013 because we have to work through the license impact of 2013. As I said, it doesn't include any acquisitions that's based on the business that we currently have.

We expect non-GAAP operating margins to be in the range of 40% to 41%. All right? That's the level we guided to for Q4, as we talked about in the earnings call. We don't see any reason to bring that up in 2014 at this point. Right? We have inherent leverage in our model. We can turn the profitability up significantly from where it is. Yes, we've added -- enable the MSP business. Yes, we've added Confio. Those are not at our overall corporate margin, and so that has brought things down. Those will work their way out, we also -- but we have simply too much opportunity to let the margins be at 55% where they were before. Right? So we are investing more heavily, and we're going to be more proactive as a management team, about not letting those expenses -- those investments not get made. We want to make those investments because it's our responsibility to capture this opportunity and drive the additional growth.

Oh sorry, I also want to point out, that 40% to 41% margin for 2014 at this revenue growth implies relatively modest growth versus 2000 -- versus Q4 run rate. Right? Obviously Q4, our outlook will be our largest revenue quarter of the year. Right? And if you look at what this guidance implies, we're talking about 8% to 10% growth over those 2000 -- although of the Q4 '13 run rate levels. Right? So I don't want you to think, okay, we've massively scaled everything up. We've invested at a higher level in Q4 this year. We intend to continue relatively in line along that path as opposed to continuing make bigger and bigger investments throughout 2014.

Lastly, a few additional details. We do have the revolver in place and $40 million of funding drawn from that revolver. Conservative estimate at this point, we would expect $1 million to $1.5 million of interest expense and 77.5 million to 78.5 million shares outstanding -- diluted shares, diluted shares outstanding for the year. That obviously includes only our current buyback program that we have in place. If we're to put additional buyback programs in place, that number could change.

Lastly, if it has not crossed the wire yet, we intend to file an automatic shelf registration. It's not something we've done in the past. Quite frankly, we've discussed it a lot of times and said, well, we'll think about that, we'll think about it. Just makes sense from our perspective, to give ourselves the flexibility to finance quickly if we see an opportunity that we want to grab. Right? No intentions at this point. We have no expectations of doing any additional financing. We have pro forma for the Confio acquisition. As of September 30, $160 million in cash, with a meaningful portion of that still in the U.S. We also have $85 million of undrawn capacity on the revolver, as well as an accordion feature where we can add another $75 million on top of that. So there are plenty of access to capital right now. Best practice is though, is to have the shelf registration in place, so we can do any sort of financing event with the timing of our choice, if we so choose to do so.

So that is my presentation. I will now take questions.

Unknown Executive

Kirk at the hand first. Your next though, John.

Kirk Materne

Kirk Materne from Evercore. I guess, just maybe on the expense ramp this coming year. I guess how much of that is sort of catch-up this year versus sort of you need to continue, is this is a more -- I know I don't want to get too far in front of you guys in terms of guidance, but is there going to be -- is it just more expensive, I guess, to support the number of products you have now? Meaning, are you guys just needing to be more aggressive on sort of the investing side going forward? And once you catch up this year you should get back into that sort of more normalized rate of leverage in the model. And I guess, if you guys do to the extent you do outperform next year, do you think most of that has the potential, I guess, to drop down to the bottom line versus what you're sure of thinking about from an investment perspective?

Jason Ream

So take the second question first. Yes, if we outperform in the revenue side, I would expect a significant portion of that to drop to the bottom line. Now, I also have a different approach to budgeting than Mike Barry had, but we still have a very strong focus. And people, some people internally have been surprised to see this part of me come out, this side of me come out and be expressed. I will not -- I do not intend to let anyone miss their budgets, right? So we want to have a very religious focus on that. So if we outperform of the revenue side, yes, we should significantly outperform on the margin side. We don't have a commission structure that will really throw that out of whack. We do at the moment, we pay -- enable commissions, the MSP commissions upfront. So to the extent that, that massively outperforms, that's a relatively small piece of the business though, to the extent that massive outperforms. But we don't have the traditional software problem of massive quarter results and massive sales expense. So yes, I would expect that to drop to the bottom line. Now, to the first part of the question, is this catch-up, is this -- what is this? So I'll reiterate the point that we have very good inherent leverage in this model. Right? What we're doing now is simply accelerating the pace at which natural phenomena results in inbound demand and awareness for us and word-of-mouth awareness. We're accelerating that because we've got a new portfolio of products. Now, new, I say, that we've assembled over the last 3 to 4 years. We've got a new portfolio. It -- organically, it takes some time for that awareness to get out there, for the brand to build around what we offer. We're accelerating that timeframe. It hasn't fundamentally changed the cost structure of the business. Right? The fundamental elements that made us so profitable, the inside sales model, leveraging online marketing, having a very efficient development organization that is driven by our customers and by what the market at large wants. Those are the fundamental elements that have been us profitable. At the moment, we're simply accelerating the rate at which our adoption and awareness grows in the market. So, yes, we've disclosed now the total revenue by product group. There are products within that mix, obviously, which have less scale. Right? As those products scale, the marketing investment that goes along with each product, doesn't scale along with them. And so it is, I guess, maybe a one-time catch-up is a fair way to say it. I would say, though, the better way to say it is, this is a one-time investment in acceleration. John?

John S. DiFucci - JP Morgan Chase & Co, Research Division

John DiFucci from JPMorgan. I know you realize this, but it's a big uptick in investment. And if you're going to invest like that, you really have to show growth on -- from it. And right now, when I back into the numbers that you gave for guidance on the top line, I come up with somewhere in the high teens or in mid-high-teens growth in license. And with the Confio acquisition, I come up with something like around 10% organic license growth, which is better than you've done this year. But it's not like what you had done in the past. And I guess, I'm just trying to reconcile because this is unprecedented for SolarWinds, this kind of investment and margins, which are still like better than just about everybody else out there or most companies, anyway. There's still -- but it is a big drop, and it's something we're going to have to talk to a lot with investors over the next -- today, tomorrow and the next couple of weeks. So just trying to understand like what that top line means. Is that like -- is that -- do you think this accelerated growth in investment is going to take a year to really start to kick in, or is that 10% organic license growth the result of this big uptick in investment?

Kevin B. Thompson

Let me answer that one and let Jason kick in. So what I'd say is, we've built into our view, time. We have not assumed that the investments we're making in 2014 are going to have an immediate impact in 2014. So do I think that the investments we're making can only grow -- drive whatever your license growth number is? Let's just say, you can only drive the license growth in number that's embedded in our outlook for 2014, No. I think you can drive much higher license growth than that, but we are not going to make that assumption yet in 2014. We need to see the impact of the marketing investments, we need to see the impact of some of the product investments and see those start to drive higher growth. Basically what we've built into this outlook is, what we're seeing right now. The impact of the things we've done through Q3 and what we think those impacts would be as we drive into 2014, we've not built an expectation in yet of what the investments that we're going to make during 2014 are going to have on 2014 new license growth levels. We absolutely believe the investments we're making will get us back into that north of 30% growth range and hopefully, higher than that over time. We have not changed our goals, our targets, our views in any way, shape or form. We're just not going to build that into the outlook until we see it.

John S. DiFucci - JP Morgan Chase & Co, Research Division

In the past, you've said you expected SolarWinds could grow for the foreseeable future, license revenue, over 20% a year. Is that still a valid...

Kevin B. Thompson

Still holds. I'm not -- I mean, we're not backing off on that at all. Our target is prior license growth rates to be 20% or greater. And there's nothing we see, and you can tell the way you're looking at the market right now that says we can't do that with the portfolio of products we have today. We simply have to execute at the levels we're executing in 2012 and in 2011, and I think we have to invest in the opportunity a little more aggressively than we have, not because it's going to be inherently more expensive for a future of time for us to drive growth, but because we need to get the momentum rolling in a much faster pace. We see an opportunity with the things that are going on in IT to make sure we're positioned well, not simply from a product point of view but also from a brand perspective. That the brand is known for things that may not be that well known for today, that as this conversion of IT continue to happen as it even accelerates that we're going to be very well positioned to be there. So that's -- I think the opportunity is good to go as fast as we'd ever we thought we could and the intent is to have us get there but we don't want to call it before we see it.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Okay. And if I might, just a quick follow up, the same subject, Jason. In your 10-Q, you announced you're going to -- CapEx this year was going to be $10 million to $15 million, which is 2x of what it was, what's likely to be after 4Q this year. Can you to, I guess, a little more detail around that? I haven't realize that the MSP business probably require some CapEx, but is it all that or what else is in there?

Jason Ream

So also in there is the buildout of offices that we're doing around the world. We've taken a part as a sublease of the new space in -- it's not a lease of existing space in Austin to expand the facilities we have there. Our building right now is getting rather cramped. There are people sharing conference rooms. And I don't know if I'd seen 5 computers in 1 room yet, but I think we're getting there. Right? So we're expanding our office space around the world, that's the primary driver of that. There really isn't anything else going to CapEx.

Kevin B. Thompson

[indiscernible] and also went up and into that building until next year. So because of the way the lease structure is going to have to account for the lease improvements that we're doing on that building as CapEx, but we'll get that money back from the landlord.

Scott Zeller

Jason, Scott Zeller from Needham. So in the past, the management team has talked about investments and staffing up and adding headcount, yet the margins have really not moved very much. Obviously, we're discussing a big move in margins. So we think -- in Kevin's comments about hiring for sales previously, how far along are we? You said you do continue in investment. We saw the pie chart there in your presentation. I mean, should we expect a material acceleration of headcount in sales, or should we think that you're where you want to be now with headcount? Because as I said, previously when you have moved headcount, it hasn't moved margins, and I think some are wondering why we're suddenly seeing such a big move.

Kevin B. Thompson

Right, right. So to answer your question, so let's take sales in particular. No, we would not expect a massive ramp in sales headcount. And we've made investments in Q3, primarily in building out the sales leadership structure. When you look at the productivity of that organization on a rep level, it isn't changing, and we're going to manage very carefully to make sure that it stays in the same range. Again, Paul hires his reps, primarily to respond to inbound demand levels, and so we don't see a massive increase there, really, any meaningful increase from a percentage of revenue standpoint. To the extent obviously the revenue growth, yes, we would love to have a massive increase in sales headcount, if it's because we are responding to a massive increase in inbound demand and license revenue opportunity. But on the flip side, no, it's not that we're making a massive increase here. I think what has changed is we that have significantly changed the business to the point where we're starting to pay off on that vision that Kevin outlined, all right? And that is, I think increased the opportunity, not in a classical way we calculate it, right? Number of products we have, prices and number of people in the world, but that we're delivering a 1 plus 1 equals 3 opportunity now throughout the product set that we have, and we want to proactively accelerate the pace at which that brand, that awareness gets out in the market, so we can take advantage of it. Because we think it's a ripe opportunity right now, but that's not a long-term shift in the growth rate of headcount. It's largely a shift, which has taken place over the course of Q3 and then to Q4. And you're seeing that play out throughout 2014 in our guide, but the inherent leverage hasn't changed. We don't see the rate of headcount growth changing over the long term.

Kevin B. Thompson

I think one comment maybe I'd make, just to be clear is -- all what -- we're saying is we're going to 40%, 41% operating margin in the fourth quarter per our outlook. What we're telling you is we're not going to allow leverage to come through in 2014. It would naturally come through. Leverage has always naturally come through. We make an acquisition, we immediately recover within 90 days to 120 days, typically all of the dilution that those acquisitions have caused. And what we're saying is we look at 2014, as we look at the size of the opportunities, you look to drive value, we think the right answer is to not let that leverage come back as quickly as we have allowed it to come back in the past. So it's not a increase of where we are in Q4 2013, we're just telling you, we're going to spend the leverage. It's going to be there, it's going to come through. If we didn't spend it, we'd be back at very high margins very quickly because that's the business we built. Again and again and again, we've delivered margins between 50% and 55% with really -- with no -- that's been completely predictable, completely consistent, we haven't missed a margin number in all the time that we've been public. Come, that doesn't mean we never can. I've been taught to say that but what it means is the business has leverage. We're just have chosen to not let that leverage come through in 2014, which would naturally come through as this acquisition become less and less dilutive, and so we're going to invest in Confio, we're going to invest N-able to make them grow even faster. We're going to invest into the opportunity we see in front of us as the industry continues to evolve. But the great thing about the way our model works is all of that leverage is there and will come through at the moment in time we decided to. At the point in time, I believe this business can only grow in the mid-20s. Then at that point, we will be a margin company at levels that I believe you've never seen before. That's not what we believe about our business. We believe our business ought to be a mid-30s grower or faster, and that's what we're going to make sure we're driving towards in 2014.

Scott Zeller

Okay, I just want to follow up -- but one, maybe I'll just ask more directly about sales headcount again. In the past, we've talked about getting to a level where you're comfortable being able to cover the transaction count and have obviously added -- Would you say that, as we sit here today, you are comfortable with the achievements you made in hiring to cover the...

Kevin B. Thompson

Yes, I think what we said on the Q3 call is we feel good about where we ended Q3 in terms of total sales capacity. So let's take talk about it in terms of capacity, not headcount. So in terms of total sales capacity, our ability to respond to the level of demand that is coming in right now and the love and the quantity/quality mix, we feel good about where we are exiting Q3. And so now we just need to make sure we stay on top of it moving forward.

Unknown Analyst

I was just wondering if you could talk a little bit about the nature of the investments, maybe what type of investments. Just because of the kind of the variable nature of the P&L, the OpEx, that you have today, it just doesn't make sense. It just would seem that it'd be very difficult to maintain the operating margin structure that you're guiding to towards next year, unless there's a lot of more fixed-nature type of OpEx coming in. Just -- on the sales headcount, that tends to be largely variable. The marketing tends to be largely variable. And those are obviously the largest buckets of OpEx on your P&L. So what is the nature of the more fixed type of investments you're going to be making?

Kevin B. Thompson

And so with the character of what we're spending really doesn't change. Just like John said in his presentation, he's not -- he's focused more on automation and branding and awareness and less on headcount. So even though you spend more rise, is not mostly fixed in nature. On the sales side, as Paul said, we add reps in line with demand. We needed to catch up, right? And to Scott's point, we didn't have enough reps at the level of demand and the quantity/quality mix to really respond well. So we needed to catch up in the third quarter, but that will go in line with demand. So it's really marketing where we're going to invest to capture the opportunity. Just making sure the whole organization is behind this install-based initiative, rather than just be a sales initiative, which was really what has been to-date, to make sure we're driving that growth even faster and make it sure to John's point, our license growth north of 20%. And I would like it to get there as fast as we can in order to get to that level quickly and not just let it build over time. We're going to invest to start to drive that, and that's really where we are. So there's really not a lot of fixed expenses being added as a percentage of total. That mix is going to stay roughly constant, which is why, to Jason's point, the leverage in the model is not changing at all. It's a point of us deciding to spin some of that leverage a little more aggressively than we have in the past based on the opportunity that we see in front of us and not letting the acquisitions get to 50% margin as fast as we normally do. Because normally, an acquisition we make it within 90 days, it's in our margin, these 2 are larger, so it's going to take them longer and we've built that into our view. And we've also given ourselves the ability to make investments in product to drive that variable marketing to even higher levels. So none of those investments are chaining the fixed versus variable nature of total expenses, that'll stay relatively constant.

Unknown Analyst

Does that mean that maybe the quotas are going to be changing or the percentage of comp that's for sales reps that's, they need to hit their quotas, is it going to be different, or maybe for some of the new investments that they're not going to bring their comp structure in line with their comp structure of the existing sales reps?

Kevin B. Thompson

No, it really doesn't mean -- I mean, what Paul said was, if you look at his chart, is that we're actually a little lower right now in sales costs as a percentage of revenue than we believe is optimal. And now it's because, to Scott's point, we were behind on hiring. We largely caught up in Q3. So it should be in that 12.8 to 13.5, 13.7 range, somewhere in there which is where we've been historically. It'll be a little higher now. It'll be a little higher in the -- early in 2014. And through a good bid of 2014 because enable and Confio are not at the same productivity that our reps are adding. We're not going to rush that. Those 2 businesses are growing nicely. We're not going to fundamentally change what they're doing. We're just going to gradually bring their cost structure along with ours but in our outlook, we're giving ourselves the time to do that in a little more measured pace than we typically do. Typically, we make an acquisition, we change product pricing, we change quotas and everything's in line with our model, almost day 1. We're not going to do those 2 businesses because they're growing very quickly, have lots of momentum. And I want the momentum to build, I don't want the momentum to slow down. We're going to take one more question, and we're going to -- we need to wrap up.

Unknown Attendee

Yes, on the acquisition, if we can sort of back into the top line contribution as for 2014, but the margin impact since you're going to continue the investments. Can you give us a feel for how much of the 9 to 10 points of operating margin contraction is due to the acquisitions?

Jason Ream

So we're not going to break out the acquisitions specifically from an overall margin standpoint. I gave you that view of what they're doing to the expense growth between 2013 and 2014. But obviously, we had enabled for a full quarter in Q3 of this year. And so there's some of that impact has already built-in from marketing perspective. Because of the lower margin than we are and because we expect that to be the fastest growing component of total revenue in 2014, that is having more impact throughout 2014 than it did in 2000 -- even in Q3 for the full quarter. But the -- I think the best way to think about it is, where is that dollar-for-dollar growth coming in 2014? And the best way to think about largest chunk, MSP business. A little large chunk is Solo and sales and marketing. Confio has relatively one-time impact there and then product development and infrastructure.

Kevin B. Thompson

Okay. So I want to talk a little bit now about kind of market strategy, how we see the markets evolving. I talked this morning about the fact that we believe that management of IPT infrastructure is becoming more complex. We believe that the performance of the application, the fact that IT exists to deliver applications to the business that, that's actually become more critical, more the thing than it's ever been. And we think that will continue to evolve. If you look at the applications that we deployed, part of that application maybe in the public cloud, part of that application on-premise. Where you look at that application mean split across physical and virtual servers, all of that is beginning to change the way IT pros think about delivering performance in the business. Now, I say, it's beginning to change because we're in very early stages. I think, one of the things to keep in mind is something that I always find at least a little amusing is when people start to think, "Oh, everything is going to change, everything is moving to the cloud or everything is moving to SaaS" It's just not going to happen, it never has, in the history of technology. If you go back 10 years or 12 years ago when I started doing my first gig as a CFO, everyone was saying, the mainframe is dead. Who in this room thinks the mainframe is dead? The mainframe is not dead. There's more MIPS of mainframe processing power deployed today than any point in time in history. Why? Because the technology works. It's bolted to the wall. It's paid for. It's depreciated. There's no economic benefit to move. Now, what we have seen using that as example, as a whole lot of new workloads being deployed in client/server environments over the years. So new technologies gets deployed in different ways. The existing technology MIPS remain. So I think we're going to end up in a world that is hybrid in nature, a world where there's a lot of technology deployed on-premise, a lot of -- in a very traditional way. A lot of technology deployed in private clouds, which is just a data center with a better -- with a catchier name and then a lot of technology over the time, deployed in public cloud. So as you think about that, we believe opportunities are going to be created, that we are very well-positioned to take advantage of. And I want to kind of take you through our thoughts around that, why we think we're better positioned than almost anybody else in the marketplace and why we see that as a really large opportunity for us, not tomorrow, right? Maybe not even next year or the year following, but definitely where we see the world going and we need to make sure that we can play over time. So if you look at the way IT was traditionally set up and the way this -- this is a cool graphic, you like this one? This is one of my favorites. As IT was historically very fragmented. You had the network guys, you had the storage guys, security guys, database guys and server guys, and they rarely talk to one another. They rarely had to deal with each other to solve problems. So it was a very fragmented view of the world, internally and externally. So as vendors sold technology and thought about building infrastructure, they really built it in the silos and the IT pros that lived in this silos weren't thinking a lot about the rest of the IT infrastructure. They just weren't forced to. But as I indicated earlier this morning, today, that world is changing. You may think you've got a network performance problem, but the reality may be, that you actually have a performance at the server level. Or in order to identify the problem that is causing performance to be slow or causing the application to be completely down is not as simple as just looking at the application. The application may be fine. Or if you look at the server, it may feel like the server is fine, but when you really look inside the guts of the problem, what you find or issue you can't see by just looking at one of these areas of infrastructure. So that has forced IT pros to begin to connect themselves in a way they haven't before.

And I'm sure you guys have heard that from a lot of other vendors over the last couple of years. But it absolute is going to begin to change the way we think about infrastructure, the way we think about building infrastructure and definitely, eventually, the way infrastructure needs to be managed. There's not been much impact today. There's not a lot of demand today from our customers, and we have more customers than most technology companies, especially on the management side. This is, hey, my world has completely changed already. The products that you're delivering to me are not meeting the need. Yes, we're hearing, and I talk about this a lot, you got to start to connect problems for me. If you can't connect different areas of infrastructure, if you can't look from storage to database, through virtualization to storage and make sure we understand the impact that those new environments are having on performance, that's the problem. Absolutely, that issue is here today, it's definitely demand we're hearing, that's what we're responding to. Right now, in terms of the way we interconnect our technologies, and the great thing is we saw that coming 5 years ago. We built a platform that gave us the flexibility to solve individual problems or collective problems. We built a platform that allowed us to release every technology we sell by itself, and to release the common underpinnings that those technologies sit on by themselves. So we thought about this a long time ago in a way other companies didn't. So it's really prepared us on the technology side to be able to deal with the world as it changed. So we're having this kind of simultaneous convergence and separation of IT infrastructure. You've got convergence around virtualization, unified infrastructure, private cloud, public cloud. But at the same time, you had applications being separate. You got composite applications though running in different places, same app. We didn't have to deal with that before. And you've got multiple deployment alternatives. So whether you deploy, and I talked about it earlier, you got customers today that have SAM, NAS [ph], dedicated storage, cloud storage, all in the same environment, and in many cases, the same application, accessing that storage in all of those mediums. That's a very different IT management world for us to start to think about. Not a lot of technology deployed that way yet, but more and more technology that is new being created that way every day, so we see in that, a large opportunity. Because as performance becomes more critical and management becomes more complicated, SolarWinds becomes more valuable to our users. And that's a simple fact. That's what's happening for the last 13, 14, 15 years as the company has been in existence, as infrastructure became more complicated, as it became harder to deliver performance and as business became more demanding, this company has shown growth. It's why we've outpaced the growth of the rest of the companies in our industry, in the areas that we compete, because we have been able to respond to these changes much more rapidly with technology that solves the problem better in a much lower cost than our historical competitors. So as indicated, the real key as you think about these 4 performance measures, one, the status quo has not disappeared. What I will be willing to wager with you is that 15 years from now, we can stand in this room again or another room somewhere else, and a lot of the technology that's deployed today on-prem, inside the firewall, in private data centers, will still be deployed right there. It's not going away. But a lot of new technology, new applications are absolutely getting built right now, today, in the cloud. Developers are building in the cloud new apps every single day, and they need a whole new set of tools to solve those problems. But the challenge is, to go back to the prior slide, the new tools that are getting created right now are just solving the application management problem for the developer. If you go back to this slide, that's not going to be good enough. If all you can look at is the performance of the application, that is not going to allow you to guarantee the performance of the infrastructure to the business user. Because that application is relying on the entire infrastructure in order for it to deliver the level of performance that it needs to deliver. So as you look at companies like New Relic and AppDynamics, who are doing some really cool stuff that we really like, to manage applications that are being built in the cloud and they're selling to a developer who's kind of a quasi-IT guy, it's really great technology. The challenge is, that's not going to be enough. They're going to have to address the rest of the infrastructure. Somebody has to address the rest of the infrastructure. And that's where we see tremendous opportunity because we already manage all of this. We manage the security, we manage storage, network, database, server, we manage applications at some level today. We don't do bi-code level instrumentation, we don't look deep inside the application and tell you what's going on, but we already have the ability to look at the application and tell you, is the experience of the user being integrated. So are we -- do we have everything we need yet? No. But when I look at the opportunity and I look at where I think technology is going, where we've very consciously positioned ourselves over the last 3 years, we positioned ourselves to take advantage of the opportunity that exists now. Because this is a business that is about taking advantage of opportunity that exists today. So this opportunity to deal with infrastructure that's beginning to unify, you have to look across different areas of the infrastructure to deliver performance, we can do that today across all these other areas of technology. But where new opportunity will get created and as more and more and more applications are built in private clouds and in public clouds and as more compute moves to private clouds and public clouds, which will happen gradually over time, that's going to create the opportunity to not only manage the application and the infrastructure that sits in the cloud, but to manage all of the infrastructure that connects that application, connects that infrastructure ultimately back to an end user. Because why does IT exist? IT exists to deliver an application to an end user. That's the only reason it exists. All this exists regardless of its on-prem, private data, private cloud, public cloud, whatever you want to call it, wherever it happens to be, it exists for that reason. So if you can't guarantee that, it's just not going to be enough to simply look at the application. So we believe, as we look forward, and this is not this year, but as we look forward, the fact that we have already created brand, we've created awareness, we'll create more brand and awareness, and we already have a very strong and proven, strong and proven set of technologies that manages performance for organizations of all sizes. 425 of the Fortune 500 are customers of ours, right? Most of the Global 2000 are customers of ours, right? But it doesn't mean I manage their entire infrastructure, but it means they've had that experience with the brand, they've had an experience with the technology, right? And then tens of thousands, 100,000 more SMBs around the world use our technology, and all of them are going to have to deal with this reality as we move forward. So it's not going to be one of those tomorrow, the IT world changes. It's going to be one of those things that, over time, being able to manage in this way, being able to deal with that combination of public cloud, private cloud, inside the firewall and deliver the level of performance a customer needs becomes more and more critical and harder to do, and fewer and fewer companies are going to be positioned to be able to do that. And when you look at some of the new vendors in the space, their challenge is going to be, they've got to add all the stuff that's taken us 15 years to add and get it to the level of performance that we're already at. We really only have one piece left, and that's the piece that gives us the ability to really look at application performance at the application level and make sure we know what's happening. The interesting thing is there's going to be new buyers of IT management. So today, our buyers mainly, a sysadmin, network admin, storage admin, virtualization admin or an IT generalist, right? In most companies that exist in the world, you have any of those specializations, you've got 1 guy or 2 or 3 guys that do a little bit of everything. Even in SolarWinds at 1,200 employees, we have very little specialization in IT today. We have a handful of IT guys scattered around the world. They're responsible for a little bit of everything. One day, they're doing Helpdesk; 1 minute, they're doing helpdesk; the next minute, there's a server that's down and they're getting that server up and running. In the next minute, we've had an attack on our website and they're dealing with that issue. Most organizations are that way. So the ability to give that IT pro a solution that allows them to easily understand where their problems are coming from becomes critically important. But also, as I mentioned, you're starting to see guys that traditionally might have been developers inside IT who had no concern about performance. They built an application inside the firewall, handed it off to IT and said, "Good luck with that." Right? Well, in today's world, when they're building those applications in the cloud, they can't do that anymore. Because if they give it to IT, and say, "Good luck with that," IT is going to look at them and say, "Yes, good luck with that. I've got no ability to make sure that application performs." So as they build the applications, they're instrumenting those applications to be managed. And at least for some period of time, they're going to be responsible for managing them. The question is going to become how does IT evolve, does that dev ops guy, like we're call them today, always have both dev and application performance responsibility, or you give more of these IT ops function, which is guys that are more IT, but with enough development knowledge, when there's a problem with the application, they can actually fix it. So definitely going to be new buyers of IT management, we're seeing that already, and I think that'll continue. And then I mentioned this already, there's a new focus on app performance. So a third-generation APM, whatever you want to call it, and it's all about making sure that, that application has been built distant from the user from day 1, that it's performing. And in order to do that, because it's distant, you have to be able to do things that you couldn't necessarily do in the past. So as you look at the status quo today, the buyer of IT management is mainly in-house IT. That's the primary buyer. Now in-house IT includes IT at SaaS companies. We have a lot of SaaS companies that are customers of ours. It includes in-house IT and places like Rackspace and Amazon. And we've got lots of companies like that, that are customers of ours, that are using our technology to manage their internal infrastructure that they're using to deliver a service to their customer. As you look forward though, you've got the MSPs, which we're now selling to. We're selling to MSPs through our enable platform. There's the cloud utility providers, the platform-as-a-service providers, the SaaS providers. So a lot of different types of companies that are coming to existence that need their infrastructure managed. And here's the kind of secret people seem to have forgotten, you know what, there's a bunch of IT guys in all those companies. In fact, [indiscernible] any IT guys live here, they're just going there. But the reality is most of them will stay here and then we're going to hire a whole new breed of IT guys that are working inside of these organizations, those guys need tools to deliver service, and they need it even more critically because IT is the business, right? It's not IT supporting the business, but in a lot of those organizations, IT is the business so performance is even more critical. SaaS providers today, companies like ServiceNow, NetSuite, you name your favorite one, right? If their infrastructure is slow, it's not just their internal guys that are mad, they really don't care about that, I'm mad, right? If salesforce's infrastructure is slow, if NetSuite's infrastructure is slow, my whole business is negatively impacted. And so the impact is much more broad than in today's world. So it could create, we believe, and already is creating in many cases, opportunities for us where management is more important than it's ever been. They're going to invest more quickly, they're going to invest more aggressively in management because they can't afford to have performance degrade. Because a very short period of a degradation in performance for one of these guys, and they're going to lose customers. And they'll lose them quickly to the guy who does the same thing that can deliver better performance than they can.

So let's talk a little bit about, very specifically about application management and how we see that evolving. So applications now, today now, are delivered in many different ways. But if you go back not that long ago, you basically had custom on-premise apps and you had packaged on-premise apps. And every other effort we've made as an industry to try to deliver applications in a different way, if you guys remember back, new companies like USX Internetworking [ph] and guys like that back in 2000, we tried to do what we're doing today in cloud, but the technology wasn't ready, there wasn't enough bandwidth, latency was too high. Well, today, all those issues are gone. Right? We have plenty of bandwidth. We've been able to remove really the issues of latency both -- I remember when we first tried to use, I was [indiscernible] we tried to use and in Asia, it was so slow, it would take us 5 minutes to put in an accounts payable invoice. Well, those issues have gone away. And because those have gone away, we can deliver applications in many different ways today. We can deliver them from a product cloud. We can deliver them from a public cloud. You got SaaS app, you have applications, they're delivered in combination between inside the firewall in public clouds and private clouds. So as that's gotten more complex, the tools that IT guys will need don't all exist yet. This world is awesome if we have -- when we get there, but today, if we got there too quickly, performance would degrade because we don't have all the tools yet we need in order to manage performance and make sure the business gets what it needs, those tools will come. And just like I said earlier, the great thing about our model is I don't need to be first. I don't want to be the first mover. I want companies who are going to spend a whole bunch of marketing dollars and a whole bunch of R&D dollars while getting the marketing wrong and the positioning wrong and then getting it right, and getting the product wrong and then eventually getting it right, so that we really understand what is the exact problem that has to be solved. But the great thing is our path to manage all things IT, which is what I started with the vision is manage all things IT regardless where those IT resources are located, regardless of where the management resources need to be located. Our path to that, we believe, is shorter than anyone else in the industry. And our ability to solve individual problems and then solve the collective problem, we believe, gives us a tremendous competitive advantage. Because you're not forced to buy in to everything that we do the way you're supposed to buy into everything our larger competitors do. And we also have the ability to sell way more than just one problem for you. If you remember the conversation earlier around fine products. What the guys are doing, they're managing, doing app management in the cloud doing these really cool stuff, but they can only solve one problem. If they may say, the app is fine, the reality is that may not be fine. Right? You may be having contention between the app and other IT resources that you can't see if all you're looking at is the app. So I think the key here is that we have positioned ourselves to be ready to compete in this world when there's dollars of revenue to be made, when there's margin to be made on every dollar of revenue, when there's no longer an evangelical sale, when it's recognized as a must-have, when the problem is well-defined, and when the spending in that marketplace is a little more robust than it is today. So is that 12 months from now, is that 24 months from now? I'm not sure. What I would tell you is that we are positioned to take advantage of the opportunity when it arises, but we're not happy to spend a lot of money to get ready for that now because where we've been headed technologically has positioned us to be ready with just a few things that we need to add. Talked about that already? So the real key on APM, and you guys have probably seen these presentations from other guys, is the thing that we don't do today is we really don't look inside the application and tell you exactly what's going on. We look at the app and we tell you is the performance good or bad. We look at the end users experience, we let you know, how is that experience? Is it good or bad? We mainly do synthetic end user monitoring, we don't do realtime user or real user monitoring, but we do little bit of that today. This is a whole different level of technology, not technology we have now. Now, technology we can build, if we want to build it, we have all the expertise in-house, we've been doing performance management for 15 years. So building is not the hard part, the question is, is that an investment that makes sense for us right now? So what we've decided, at least for now, because it is still early, is not to make that investment ourselves, and to build the technology, because it's just not the right time to build that technology. So you may have seen an announcement that went out, I think yesterday, could be this morning, that we've made a small investment in a company called AppNeta, actually, based up here in Boston that we believe has really good application management technology, that we believe has a set of technology that actually is better than anything else that's out there. They just don't have the brand and the reach yet that some of the other guys have. And so what this is going to give us the ability to do is learn. It's going to give us the ability to learn what are users asking for, where is the demand, what is the technology that they need, what are the problems that they're trying to solve and how critical those problems and how fast growing is that market really minus the hype, right? Even cloud is still more hyped than reality. Yes, cloud is growing, but not at the pace everybody would have said it was going to grow 9 months ago or 1 year ago. It's growing. It's going to continue to grow. So we want to make sure that we understand what's going on in this marketplace, and that's what this investment allows us to do. It allows us to have a dialogue with a company that's playing in this space everyday, whose technology we think is really strong, and we've looked at almost every technology in this space before we decided to make this small investment so that we can understand where is the world going, how fast is it going there, because this really is the last piece of the puzzle we need to be able to provide that management. So as I said before, we think we're really well positioned for where the world is going. We think we're well positioned for where it is now, better positioned than we've ever been as a company for where demand exists today. And we've got ability to solve problems in a way that no one else can, it gives us competitive advantage. We think we're well positioned to tie APM into our overall IT management set of products and do that in an interconnected way, which will allow us to solve the problems that we believe will arise better than anyone else in the industry. We don't think it's going to be good enough to simply solve one problem because that's not going to allow you to guarantee performance. We have the advantage of having a very large customer base. We have hundreds of thousands of customers around the world, added 20,000 customers in the last 12 months alone. There's almost no one else in this space that has 1,000 customers or 2,000 customers. So we have a huge opportunity to leverage those relationships we have. And in many cases, we're already managing their servers. In many cases, we're already managing their package applications and at least telling them what the user's experience is. So to add this technology, we believe, will be an easy install base cross-sell, upsell when it's the right time to bring it to market. And we think the combination of our technologies and then adding an APM when it's time will give us a very powerful product approach that we don't see anyone else who can match right now. Because when you look at the large vendors, yes, they'll go try to build this, but the technologies they have to manage the rest of the infrastructure, so to manage all of this, servers, database, network, storage, security, their technologies just aren't very good. Right? They're super heavy, they don't solve the problem well, they're not keeping up with the rate of change in IT. So the guys who have some of this portfolio like we do, they don't have a portfolio that allows them to move at the pace they need to move and to solve the problems the way they need it to be solved. The guys that have some of this, they've got to figure a way to add it over time. And you're not going to get there over night because it's taken us 15 years of being in these markets to really build a complete portfolio of technologies to manage that entire infrastructure. And the real power of our model of you've got a security problem, I'll solve just that today. You have a database performance problem, I'll solve just that today. You had a physical server performance problem, I'll solve just that today. You got a virtual server performance problem, I'll solve just that today. And then when you need another problem solved, the ability to just come and add technologies very easily to plug-and-play to solve those problems, we believe, will allow us to be very successful today, tomorrow and a lot of tomorrows forward.

All right. Questions on that? No? Yes? Everybody's tired or sleepy? Even as fast as I talked, you guys are sleepy? Hard to believe.

Unknown Attendee

You mentioned some of the guys out there that they've been growing quickly for years by not bringing it in-house. Don't you run the risk of having that market just develop and mature and have those guys grab more share?

Kevin B. Thompson

So actually, how -- look, I'm betting on that market developing and maturing. I want that market to develop and mature. I want those guys to be tremendously successful because it's in their success that they will define the problem, they'll create the recognition. It's a must solve problem. It doesn't really exist broadly yet today, especially as you move past the Global 2000, down into smaller organizations. So their success actually creates opportunity for us. So I'm not worried about that at all because what we do well, what we've always done well, is we go into markets that already exist, markets that have large, incumbent players. And we go and we solve the problem more effectively at a lower cost with a distribution model that's just superior to what they've been able to put together. So I want those guys to be successful, and to be frank, we need them to be successful if we're ever going to play in this market. If they're not tremendously successful, we won't play in this market. Right? They need to be successful to validate that the market exists and to create the recognition that the problem is critical, that it has to be solved and do all the work for you on how do you want to solve it. Because there's lots of different ways to solve this problem, right? When New Relic is doing AppDynamics and BlueStripe, and AppNeta is doing, they're all a little bit different. But they're not all going at the problem in exactly the same way because no one yet knows exactly how they want the problem to be solved. New Relic absolutely has the most momentum. Good technology, great team, we love what they're doing, but they're a $40 million, $50 million company, maybe $60 million, maybe $70 million, who knows, somewhere in there, right, $50 million to $80 million, you pick. But that's -- they're almost the entire market today. So an $80 million market is not interesting to me today, right? All the markets we play in are in the billions. That's where this model really work because commoditize $80 million, you get $10 million, maybe you get $12 million, maybe $20 million, not very interesting. Right? But if you commoditize a market you think is going to $3 billion, $4 billion, $5 billion, and you get $600 million, $700 million, $800 million out of that over time, then also that's interesting in the way we think about going to market.

Unknown Attendee

In terms of additional technologies that you guys need, and you're making this investment, not acquiring this company, but as we look into 2014, how should we think about the pace of acquisition versus what we've seen over the past couple of years?

Kevin B. Thompson

Yes, that's a good question. So in terms of pace of acquisition, what I would say is I would expect that we'll do fewer acquisitions in 2014 than has been our average over the last 3 years. 2013, we haven't done that many deals. They've been a little bit larger, a little more strategic. So what I would say is, and what we've said externally, is I'm not looking to add any more tools or IT pros at this point. We talked about though strategically important, not big revenue drivers, but they create relationships. I think we've got enough of those right now. So what we're looking at is technologies that solve problems that are significant problems, server-based, they're going to have an average transaction size in that 10k to 15k. Because we think that is where we need to add to our portfolio right now, not add on that small product side. We've added enough technology to create a relationship, which is why we went at that as hard as we have over the last 3 years as those technologies gave us brand, gave us relationships that we didn't have in markets we weren't participating in with before. So now, we can leverage what we've created by bringing technologies to market that we believe those guys will buy. They're more critical to the performance of their infrastructure. So I would expect that the number is going to be less than what you've seen in the average of the last 3 years. We could do none. We could do a couple. I wouldn't expect that we're going to do 4 or 5. I think it'll be 2 or 3. Now, I could change my mind, if I do, I'll tell you. But right now, it's what I believe.

All right. So let's wrap up quick, and some of these are already covered, so I'm just going to build this out. So just in closing. We really do believe that we are uniquely positioned in IT management, both today, and we think we're uniquely positioned for tomorrow. We have very consciously assembled a set of technologies that allow us to solve most of the problems that IT pros face today and that give us a platform, not using their traditional platform sense of the word, to solve the problem that we believe IT pros are going to have tomorrow. We have the ability to do that in a way we -- that no one else in the marketplace can. We can solve your individual problem, like the point product providers, and we can do that very affordably, but at the same time, we can connect all those technologies together for you, give you a view of whatever piece of that infrastructure you need a view of. If you just need storage and virtualization, great, we can do that. If you just need networks and applications, great, we can do that. If you just need networks and database, great, we can do that. Or we can give you a view of the entire infrastructure if that's what you need, but the great thing is we don't force you to make that investment today. We allow you to solve the problem you have, add technologies as we move forward, that's a very unique position in the marketplace, none of the big guys can do it, and none of the small guys can do it. We're really the only the only player in IT management that we believe can solve that problem that way. We do think with a lot of hard work over the last 3 years, we positioned ourselves to address the growth opportunity. To John's question earlier, we're going to grow faster in 2014 than we did in 2013, we're confident about that, especially on the license side. We have that maintenance dropping just the impact of 2013, but on the license side, subscription side, we expect to grow faster. We're making the investments we're making in our business to grow even faster in 2015 and beyond because our goal is not to be a mid-20s grower, our growth -- which is good compared to the history of time, but our goal is to be in that mid-30 range or even higher, and that's what we're driving this business toward. And we're absolutely investing to make that happen, but we haven't baked in the impact of those investments yet into our outlook. As we see it, we will, but we won't bake it in until we see it. And the unique leverage in our model, the levers that's allowed us to be at an average margin I think of 53% for the last 2 years, that leverage is completely intact. So even though we're not going to allow that leverage to come through in 2014 because we don't think it's the right thing to do from lots of perspectives. Look, to be completely frank, we don't get any credit for it externally. I know you guys say we do, you're wrong. Because when you look at the metrics, we're growing this year, 13 points slower than the fastest growth names in technology. We are delivering 46 -- they're spending 46 percentage points more of revenue to deliver 13 points more growth. That math doesn't make any sense to me. I get it. So part of it is simply we see opportunity. We can drop our ROI bar just a little, still be among the most profitable companies ever in the history of software and drive this business fast-forward a little bit faster than we've been driving it. So we wouldn't be doing it if we didn't think we can accelerate growth. We haven't built a lot of that acceleration into our outlook for 2014 yet, built a little, but we do expect that it will accelerate our growth. But we've given ourselves the time to see it happen. So with that, I appreciate you guys coming and for staying, I know we went a little long, apologize for that, we just had a lot to say. So thanks a lot.

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