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SolarWinds (NYSE:SWI)

Q4 2013 Earnings Call

February 05, 2014 5:00 pm ET

Executives

David Hafner

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

Jason Ream

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

Analysts

Kenneth R. Talanian - JP Morgan Chase & Co, Research Division

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Aaron Schwartz - Jefferies LLC, Research Division

Stewart Materne - Evercore Partners Inc., Research Division

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

James Moore - FBR Capital Markets & Co., Research Division

Jonathan Parker - Morgan Stanley, Research Division

Gregg S. Moskowitz - Cowen and Company, LLC, Research Division

Tim Klasell - Northland Capital Markets, Research Division

Operator

Good afternoon. Welcome to the SolarWinds' Fourth Quarter 2013 Earnings Call. Today's call is being recorded. [Operator Instructions] At this time, I'd like to turn the call over to Mr. Dave Hafner, Director of IR. Please go ahead, sir.

David Hafner

Thank you, Martha. Good afternoon, everyone, and welcome to SolarWinds' Fourth Quarter 2013 Earnings Call. With me be today are Kevin Thompson, our President and CEO; and Jason Ream, our Executive Vice President and CFO. Following prepared remarks, Kevin and Jason will have a brief question-and-answer session. Please note that this call is being simultaneously webcast on our Investor Relations website at ir.solarwinds.com. Please remember that certain statements made during this call, including those concerning our financial outlook for the first quarter and full year 2014, our growth opportunities and expectations, our market opportunity, our investment strategy and area of strategic focus and product development plans are forward-looking statements. These statements are subject to a number of risks, uncertainties and assumptions described in our SEC filings, including our Form 10-K for the fiscal year ended December 31, 2013, which we anticipate filing with the SEC on or before March 3, 2014. Should any of the risks or uncertainties materialize or should any of our assumptions prove to be incorrect, actual company results could differ materially and adversely from those anticipated in these forward-looking statements. These statements are also based on currently available information, and we undertake no duty to update this information except as required by law. Cautionary statements regarding these forward-looking statements are further described in today's press release.

In addition, some of the numbers during this call will be presented on a non-GAAP basis. Our use and calculation of these non-GAAP financial measures are explained in today's press release and a full reconciliation between each non-GAAP measure and its corresponding GAAP measure is provided in the tables accompanying the press release. Each non-GAAP item in our forward-looking financial outlook that we will provide today has not been reconciled to the comparable GAAP outlook item because we cannot reasonably or reliably estimate future adjustments such as stock-based compensation expense which is dependent on our stock price at the time. I'll now turn the call over to Kevin.

Kevin B. Thompson

Thanks, Dave. Good afternoon, everyone. Thanks for joining us on our fourth quarter 2013 earnings call. I'm pleased to report that we finished 2013 off by delivering our strongest quarter of revenue growth of the year. Total revenue for the fourth quarter 2013 grew by over 32% against a strong compare from the fourth quarter of 2012, reaching $97 million which exceeded the midpoint of our outlook by almost $6 million. In addition, as we have shown on a number of occasions, when we exceed our quarterly outlook for revenue, we also generally exceed our outlook for non-GAAP operating margins in the fourth quarter of 2013 with no exception, as we drove a non-GAAP operating margin of 45% which exceeded the midpoint of our outlook by almost 5 percentage points.

Despite what is imbued, both internally by our team and externally by investors, as a bit of a challenging year for us, for the full year 2013, we delivered 25% year-over-year total revenue growth reaching $335 million. In combination, we generated non-GAAP operating margin of 51% and non-GAAP earnings per share of $1.63, both of which exceeded our outlook for 2013.

In addition, we generated a free cash flow margin of 50% for the full year. These combined results put us among the best overall performers in software for 2013 as our combination of growth, cash flow and profitability can only be matched by a select few technology company.

In addition to our acceleration in total revenue growth, license revenue growth also accelerated in the fourth quarter as we delivered year-over-year growth of 20% and came in more than $3.5 million above the midpoint of our outlook, reaching $39.5 million. Getting our quarterly licensing revenue growth back above 20% has been one of our medium-term goals, and I'm pleased to report that we achieved that goal ahead of our expectation.

Our fourth quarter recurring revenue comprised of maintenance and subscription revenues reached $58 million for the fourth quarter, reflecting very strong year-over-year growth of 42% and was more than $2 million above the midpoint of our outlook. Recurring revenue reached 59% of total revenue for both the fourth quarter of 2013 and for the full year, increasing by 6 percentage points as compared to the full year 2012.

I'm very pleased with the sequential acceleration in year-over-year revenue growth rate we delivered in the fourth quarter. And also that we did not let 2013 get away from us without delivering an outstanding quarter of growth and profitability. We continue to be unique in our ability to deliver the combination of growth and profitability when compared to our high-growth periods in software and in many cases spend been well in excess of $1 to generate $1 of revenue.

I will now take you through some of the highlights from the fourth quarter and how we believe the investments we've been making in our business have begun to positively impact our quarterly results. From a product perspective, there were a number of important performance highlights and improvements during the fourth quarter that we believe are encouraging. The breadth of strong product performance we drove in the fourth quarter reflect the increased level of focus and investment we have made throughout our marketing sales and product development organizations to deliver more consistent results across our entire product portfolio.

First, we're pleased to report improvement in year-over-year growth of our core network management products which reached a record level of license sales in the fourth quarter. This included record quarterly license sales in the commercial market globally, as well as individually in North America and EMEA. We believe our ability to achieve our record level of license sales of our core network management products in the fourth quarter validates our view of the size and growth opportunity for us in the network management market. Our roots are based in network management and we're beginning to see the positive impacts of increased focus on network management by our global organization. We believe that the opportunity in this market continues to be large, growing at a consistent rate and still mostly untapped despite the age of the market. We are committed to driving accelerating revenue growth in network management in 2014 through higher investments and demand capture and aggressive product development efforts which I will discuss in my closing remarks.

Second, we generated very strong overall growth in systems & application management during the fourth quarter, driven by strength across most of the individual products within our systems and application management portfolio. Including our most significant core products, SolarWinds Server & Application Monitor, SolarWinds Virtualization Manager, SolarWinds Storage Manager and SolarWinds Database Performance Analyzer. Even excluding the contribution of SolarWinds Database Performance Analyzer, license sales of our core systems & application management product in the fourth quarter grew at the highest aggregate year-over-year growth rate we have generated in 5 quarters. This growth was led by SolarWinds Server & Application Monitor and SolarWinds Virtualization Manager, both of which shattered previous quarterly license sales records while growth and license sales of SolarWinds Storage Manager improved as compared to the first 3 quarters of 2013.

Turning back to SolarWinds Database Performance Analyzer. The first quarter performance for license sales of our database performance management products were higher than our outlook. However, on the license revenue front the outperformance of license sales for SolarWinds Database Performance Analyzer did not all come through to recognized revenue due to certain changes which needed to be made to the contract provisions for sales of this product. As a result, certain license sales transaction we closed in the fourth quarter were required to be deferred and will be recognized ratably.

Finally, our MSP business continued to build momentum in the marketplace, delivering another record quarter of subscription bookings which increased by over 30% sequentially while also showing improvement in overall customer retention rates. The MSP market is proving to be a strong global market for us and 41% of our new MSP bookings were from international markets in the last 6 months of 2013.

From a regional point of view, our North American commercial sales team had a strong quarter, delivering year-over-year new business sales growth of 41% in the fourth quarter and sequential growth of 33%. New business sales includes both the license sales of our products and new subscription bookings of our MSP offerings. After declining in the third quarter, our U.S. Federal business showed signs of improvements delivering year-over-year new business sales growth up 10% in the fourth quarter while declining by 60% sequentially. The sequential decline was consistent with both our historical Q3 to Q4 trend and our expectations.

Led by the contribution from the U.K., EMEA new business sales grew 22% year-over-year in the fourth quarter and 34% sequentially, reaching a record level as the additional management depth and sales rep capacity we added to our sales team in core, positively impacted our ability to respond to the level of demand we are capturing in the region. We feel like we are entering 2014 with the ability to deliver meaningful acceleration in growth in EMEA.

We also saw a solid improvement in the fourth quarter performance of our Latin America business which was down year-over-year in the third quarter of 2013. In the fourth quarter, license sales increased by 42% sequentially, and were up by 5% year-over-year against a tough growth compare from the fourth quarter of 2012.

APAC is the one region where outperformance in the fourth quarter -- where our performance in the fourth quarter did not meet or exceed our expectations. Our overall new business sales growth in APAC was solid at 11% year-over-year growth for the fourth quarter. However, that growth was driven by a good quarter of sales by our MSP team in Australia and a solid quarter of license sales in Asia by our Singapore team, partially offset by a weak license sales quarter in the Pacific region.

On the license sales front, our results were below our expectations. We had strong license sales growth in several countries including China, Singapore and India, as our Singapore sales team finished what has been a very strong growth year in 2013 for them with a strong fourth quarter. However, our overall license sales performance in APAC region was negatively impacted by a meaningful decline in license sales in Australia. The performance of our MSP business, which completed a very successful year in Australia, gives us confidence in the growth opportunity in the region and highlights the issues we have experienced in the Pacific region and license sales are internal to us. We're actively addressing these issues that have impacted our license sales performance in Australia for a number of additional organizational structural changes that we believe will yield improvements during 2014.

We're also beginning to see a number of the operating metrics we track beginning to improve in a meaningful way. These include: commercial sales productivity for the fourth quarter was at the highest level we've seen since the first quarter of 2013 despite an over 20% increase in sales headcount since the end of the first quarter. We believe that we can sustain and improve these levels as we move through 2014.

Commercial core product average transaction sizes continued their steady climb, increasing by 11% sequentially to approximately $8,700 for the fourth quarter of 2013. Average transaction sizes are now squarely back in a range where we feel comfortable and are at their highest level since the second quarter of 2012. Commercial core product transaction volume continued a string of solid growth quarters at 20% year-over-year growth. Our installed base initiative continue to pick up steam in the fourth quarter with sales by our installed based teams around the world increasing by over 200% as compared to the fourth quarter of 2012, and commercial pipeline conversion rate improved compared to the first 9 months of 2013, which we believe has been primarily driven by an improvement in the quality downloads captured by our demand generation engine which as we've indicated has been one of our areas of focus during the last 3 quarters. So while we remain focused on continuing to make improvements to our demand generation and sales engine, we feel good about what we have accomplished over the last 2 quarters in 2013 and believe that we have put ourselves in a solid position from which has accelerated new business growth in 2014.

With that, I will turn the call over to Jason.

Jason Ream

Thank you, Kevin. Good afternoon to everyone on the call. As I'm sure you've heard in Kevin's remarks, we are excited about what we accomplished in Q4 and about where we believe we're headed. Before I dive in, I just want to hit a few highlights from the quarter. First, Q4 was a really strong growth quarter with double-digit sequential license growth over Q3 and double-digit year-over-year growth in all 3 revenue categories.

Second, despite significantly ramping our operating investments, we delivered non-GAAP operating margins of almost 45%, above our guidance of 40% to 41% and delivered non-GAAP EPS of $0.41, above our guidance of $0.33 to $0.34, showing a leverage that is still inherent to our model. And third, Q4 was a huge cash collection quarter for us. Our cash collections of $90 million in Q3 were a record high at the time and a significant increase over $80 million in Q2. But in Q4, we collected over $100 million, a milestone for the company and a testament to the great team that we have working with our customers. Our strong cash collections also drove $49 million in free cash flow in the fourth quarter.

On our last earnings call and at Analyst Day, we said that we plan to make an increase in our operating investment and we began to make progress on those plans in Q4. We increased our operating expenses by almost $10 million in the fourth quarter over the third quarter, funding initiatives that we believe are important to our long-term goal. I'm pleased to note that included in the quarter-over-quarter increase as we added expense for Confio which fell within the range of $4.25 million to $5 million that we gave on the last earnings call. However, even excluding the impact of Confio, we increased our investment in our network and systems management business by over $5 million sequentially in the quarter. That increased spend was split relatively evenly between product development, marketing and sales. Within product development, we're building several new products, as well as working on significant releases for existing products, which Kevin will talk more about in a few minutes. We are also focused on delivering to our customers on the promise of new and important functionality every release of every product.

In marketing, our teams are focused on driving higher levels of quality demand to the sales team in the short-term, but also on filling the top of the funnel with branding and awareness programs that grow the reach of SolarWinds to a much broader range of IT Pros than where we are today. At the same time, our marketing team is intent on building processes and automated systems to scale our marketing efforts to reach all types of IT Professionals and companies of all sizes in all geographies with a personalized touch that matches the wants and needs of each individual without meaningfully ramping our headcount.

And finally in sales, we have continued to add capacity under the management structure that we built in Q3 and early Q4. We continue to feel positive about the management changes that we've made and now are encouraged to see those leaders building strong teams and aligning our sales capacity to the opportunity and demand that we believe we see in the market.

During the fourth quarter, we added approximately 100 full-time employees, bringing our total as of December 31 to just over 1,300 employees worldwide, including the employees that joined us through the acquisition of Confio. However, as I previously mentioned, headcount is only one part of our investment strategy. We are also aggressively building systems that provide leverage as the company grows. With this planned investment, we guided to 40% to 41% non-GAAP operating margins for the fourth quarter and delivered 45%.

The important point about our fourth quarter profitability is that it was largely driven by revenue outperformance and not by underspending against our plan, as the investments we are making are important to our long-term growth. We believe that our margin outperformance proves the point we made at Analyst Day, which is that the investments we are making are not changing the fundamental leverage and profitability of our model. Our investments are designed to accelerate new business growth by catching up on some investments in the business and by accelerating investments in the opportunities we have created through our product development and acquisition activity over the last several years.

Our operating model continues to have a number of leverage points. For example, we believe our increased spend in R&D does not need to ramp at the same rate as the rate at which we add customers since we do not customize our products for individual customers. Building additional features into our products applies to customer number 1, customer number 1,000 and customer number 100,000 equally. Of course, our marketing is designed to appeal for an audience of millions of IT Professionals around the world, so we are focused on scalable, one-to-many initiatives that inherently offer leverage as the business grows. Our cost of customer acquisition is rising now as we catch up on some needed marketing investments. While we expect the cost of customer acquisition to level out in the long-term while our strong customer retention and profitable recurring revenue streams drive leverage for the overall business. And in sales, we are not changing our download-driven, selling from the inside model. We still expect to be able to get the same productivity and efficiency from our reps that we have seen historically even though we increased our sales capacity by over 20% over the last 9 months of 2013.

Next, I committed to you at Analyst Day that we would provide certain performance metrics for our business each quarter and I will now take you through those metrics. First, our Network Management products finished Q4 with $59 million in total revenue, up from $58 million in Q3. Network Management revenue increased by 12% year-over-year in the fourth quarter, a higher growth rate than in Q3 and grew 13% for the full year of 2013.

Second, our systems management products finished Q4 with $30 million in total revenue, up from $24 million in Q3. Confio is included in the total in Q4, but the majority of the increase in that number actually came from historical SolarWinds products. Systems management total revenue increased by 49% year-over-year in the fourth quarter and by 38% for the full year 2013.

Third, total revenue for our MSP products was $8 million in Q4, a sequential increase of approximately 25% from $6 million in Q3. Fourth, we finished Q4 with 27% of our total revenue coming from outside of North America, up from 26% in Q3. For the full year of 2013, international represented almost 27% of total revenue, up from 25% in 2012. While we believe we still have a lot of room for improvement and expect faster growth from international than North America in 2014, given the relative size of our international business and the size of the international market opportunity, we are encouraged to see our efforts result in an improvement in this metric.

And lastly, as Kevin indicated in his remarks, our installed base sales teams around the world are performing well and delivered 202% year-over-year growth in the fourth quarter. While our relatively new EMEA installed base sales team contributed meaningfully to that success, our North American installed base team alone delivered over 160% year-over-year growth in the fourth quarter. On a full year basis, sales by our installed base team increased by 112% as compared to 2012.

Now I would like to turn to our guidance for Q1 and the full year of 2014. As we did at Analyst Day, we will provide our revenue guidance at the total revenue line, reflecting our strategy of and focus on driving total revenue growth. We have never looked at our business as a traditional perpetual license model as our unique pricing model has been focused on maximizing the long-term value of a customer and not on maximizing first-year license revenue and we have encouraged investors and analysts to understand these important differences. And now, our unique model, coupled with the addition of a subscription revenue stream through the acquisition of N-able in May 2013, has resulted in recurring revenue increasing to approximately 60% of total. Also, as we look forward to future potential of cloud management offering serving both the cloud and SaaS world, some of which will likely be sold on a subscription basis, we believe that investors and analysts cannot look at our business as a traditional perpetual license model. This does not mean that we are backing off of our previously stated long-term license growth goal, as we are not. But rather, that we believe that total revenues is the most important and relevant metric for investors and analysts to watch, to gauge the success of our efforts. As such, we plan to provide our future revenue outlook on a total revenue basis only. However, we are going to treat 2014 as a transition year and on this call, I will provide our outlook for both license and recurring revenue growth for the full year of 2014.

We do not plan to provide our outlook at this level of detail moving forward, but we'll provide our outlook for total revenue growth, as well as total revenue growth for our network management, systems management and MSP product groups. I am now going to walk you through a relatively detailed view of how we are thinking about building to our total revenue expectations for 2014. But first, let me give you those expectations.

For the first quarter of 2014, we expect total revenue to be in the range of $92 million to $94 million, representing 26% to 29% year-over-year growth. This increase in growth rates will primarily be driven by new business growth, both license and subscription. In Q1, we expect license revenue to decline from Q4, as we typically see the decline in organic license bookings, exiting the end of 1 fiscal year and entering the beginning of a new 1. We do, however, expect a strong Q1 on a relative basis with year-over-year growth in license revenues, driven primarily by the changes that we have made to our sales organization and the effect that those changes have already begun to produce, as well as by the acquisition of Confio in Q4 of 2013.

For the full year of 2014, we expect total revenue to be between $408 million to $420 million or 22% to 25% year-over-year growth. This full year guidance represents an increase of approximately $8 million to $13 million from the midpoint of the outlook that we provided for the full year at Analyst Day, driven primarily by 2 factors. First, the impact of the improvement in demand generation efforts on the pipeline with which we entered 2014 as compared to 2013; and second, the impact on recurring revenue in 2014 from the bookings outperformance in Q4.

For the full year of 2014, our total revenue outlook is based on an assumption of 12% to 18% license revenue growth, which is an acceleration relative to the 10% license growth we saw in 2013. We expect this acceleration to be driven by improved demand generation results, higher sales productivity, increased sales capacity which we believe will result in an accelerated growth for our network management business and a full year of sales for SolarWinds Database Performance Analyzer.

Next, we expect maintenance revenue to grow sequentially from Q4 to Q1 2014 and show strong growth year-over-year for both the first quarter of 2014 and for the full year. However, I want to point out 2 key phenomena that you should take into account in your model. First, year-over-year maintenance revenue growth in both the first quarter of 2014 and the full year of 2014 will be negatively impacted by lower license sales growth rates in 2013 as compared to 2012 which caused the percentage growth in new maintenance dollars to be lower in 2013 than it was in 2012. This negative effect on maintenance revenue will, of course, be partially offset by our strong customer retention and maintenance renewal rates which we believe will be consistent in 2014 with our historical levels.

Second, when you look at the sequential growth in Q1 2014 only versus Q4 of 2013, please note that we recognize maintenance revenue on a daily basis and there are 2 less days in Q1 than there were in Q4. So while our daily recognition rate will grow meaningfully from Q4 to Q1, the overall quarterly total will not grow as fast because we have 2 less days of recognized maintenance revenues. And last but not least, we expect subscription revenue to increase sequentially from Q4 into Q1 and throughout each quarter of 2014. As we build into the subscription revenue streams, which is new for us and was not N-able's primary revenue model prior to acquisition, I would urge you to be conservative regarding the sequential growth rate that you model. However, by the second half of 2014, we expect sequential growth rates to be relatively consistent with what we experienced from Q3 to Q4 of 2013.

In sum, our outlook for total recurring revenue growth which includes maintenance and subscription revenue represents an increase of 28% to 30% for the full year 2014. As you look at how revenue lays out over the course of the year, our license revenue has historically remained fairly consistent from Q1 to Q2, increased sequentially by a meaningful amount from Q2 to Q3, driven primarily by our U.S. Federal business as U.S. Federal government buying picks up and typically total license revenue for Q4 stays near the Q3 level as U.S. Federal drops off in Q4 and commercial growth accelerates as commercial customers ramp their spending at the end of the calendar year. We expect 2014 to be generally consistent with the historical trends. Maintenance and subscription revenue should ramp sequentially throughout the year with the overall growth rate impacted by the factors I discussed earlier.

In terms of product performance in 2014, we expect total revenue from our network management products to grow by approximately 9% to 12% for the full year of 2014 and total revenue for our Systems Management products to grow by approximately 35% to 40%. These growth rates are consistent with what we saw in 2013, but reflect accelerating license growth, offset by decelerating maintenance revenue growth due to lower license sales in 2013. We expect total revenue from our MSP products to grow by approximately 110% to 125% for the full year of 2014, obviously comparing a full year in 2014 to a partial year in 2013, but reflecting higher apples-to-apples growth rates in the second half of the year than either of our other product groups. Lastly, our revenue expectations assumes a Euro to U.S. dollar exchange rate of 1.31.

Turning to our margin outlook, we expect our Q1 non-GAAP operating margin to be in the range 40% to 41%, consistent with our plan in Q4. Based on our current investment plan for 2014, we are planning to hold full year 2014 margins at that same level of 40% to 41%. While we plan to actively manage our spending to those levels, to the extent that we outperform on the top line for the first quarter or during the year, we would again expect to see non-GAAP operating margins come in above our guidance range. And below the operating profit line for the fourth -- first quarter, we expect to have a non-GAAP tax rate of approximately 20%, approximately 76.5 million diluted shares outstanding and non-GAAP earnings per share of $0.34 to $0.36. For the full year 2014, we expect non-GAAP tax rates to also be approximately 27%, weighted average diluted shares outstanding to be approximately $77.5 million and non-GAAP earnings per share to be approximately $1.55 to $1.65. With that, I'll turn it back to Kevin for his closing remarks.

Kevin B. Thompson

Thanks, Jason. As you can hear by our comments on this call, we feel positive about the velocity of our business exiting 2013. We believe that the investments we've been making in marketing and sales have begun to pay dividends, resulting in the accelerating revenue growth over the last 2 quarters of 2013 and have put us in position to scale more effectively in 2014 and beyond.

We also believe that we have yet to see the impact from a large portion of the incremental investments in our business that we kicked off during the last 6 months of 2013. These investments are in product and infrastructure which require more time to complete and to begin to have a positive impact on performance. But I would now make a little departure from our standard earnings call practice to provide a view into some of the product initiatives we are working on that I'm excited about.

From the network management side of our product line, our technology investments are focused on ensuring that we extend the gap between our network management offerings and all of the offerings, other offerings in the market. We believe that we continue to be the leader by a wide margin of providing solutions to the network management problems faced daily by IT Pros with a set of product designs specifically based on their needs and exciting IT Pros every day when they use them.

Our network management product priorities for 2014 include, first, network-centric APM. Focused on providing detailed analysis of transactions across the network for visibility into end user experience and the root cause of network and application performance issues. We believe that this will allow us to solve a set of problems for SaaS companies and cloud providers that we have not previously been able to address.

Operational insight and root cause analysis, which includes the development of a global search of unstructured data for both log and network performance data in addition to base lining and automatic dependency mapping. We believe that this big data approach in network and systems management performance allows our products to solve a set of increasingly complex performance issues for IT Pros. We believe that this functionality will allow us to capture demand from a completely new set of potential customers, as well as allow our existing customers to expand the use of our products, which they already own. Third, advanced troubleshooting and remediation which will provide additional cross-product integration aimed at allowing users to not only identify the cause for network performance issues, but also to remediate those issues which we believe will allow us to increase the number of products for invoice and sales transactions, as well as increase the speed at which we're able to penetrate our large and growing installed base opportunity. And finally, fourth, bring-your-own-device in mobile visibility, which extends the current ability of our products to know what devices currently are and what devices have been, connected to the network and to also provide IT Pros with the ability to disconnect rogue devices when necessary. We also expect to be able to show IT Pros the details regarding the specific device and how that individual device was able to connect to the network.

In addition, we are planning to add specific mobile views to provide IT Pros with additional realtime visibility into issues surrounding mobile devices, network performance and security. Our systems management product portfolio is coming off a third consecutive year of very strong growth. We believe this growth has been driven by a combination of the investments we have made, increasing the awareness of the broad range of systems management problems that we can all now solve for IT Pros, coupled with a rapid expansion of our Systems Management product line.

In 2014, we are focused on deeper integration of these products to provide faster and easier cross sales into our customer base, as well as extending the functionality of our application management product portfolio, to make additional progress towards our stated goal of managing all things IT, without regard to the location of the application or to where the management resource needs to be located.

Our 2014 systems management product priorities include, first, application stacked integration and visualization which means that we are working on bringing our Virtualization Management, Storage Management and Database Management Capabilities on to the Orion platform. This will allow us to provide end-to-end visualization across applications, servers, database, virtualization and storage which we believe is increasingly necessary to provide IT Pros with the ability to understand what is causing the performance issues experienced by end users. However, in true SolarWinds' fashion, we will continue to provide IT Pros with the ability to manage only the individual pieces of this infrastructure based on their current needs and priorities while making it very simple to add visibility into an additional part of all of this infrastructure with a set of products that each solve a set of problems, but that also integrates seamlessly. This is one of the key differentiators to our model of building, packaging and delivering products to IT Pros.

Second, distributed and hosted-IP environment where we are currently adding functionality to our server and application management products to provide visibility into the performance of applications and servers that are distant from the end-user. We believe this functionality will make our products even more compelling to SaaS companies that are delivering applications to the end customers for multiple data centers or cloud. Our systems management products will also be enhanced on the development of global search, of the unstructured log and performance data I mentioned during my discussion of our network management products priorities and is able to provide additional visibility into the root cause of application performance issues. And finally, cloud management, which is a simple term, the one that has broad meaning, will also be a focus for us in 2014 as we began to make progress towards the technology direction that we laid out at our Analyst Day in November. This will not likely be a contributor to top line growth in 2014. However, we will make investments in moving the strategy forward, and we do believe that this market will reach the level of maturity in the not-too-distant future that we can begin to exploit.

And finally, we have quietly assembled a number of products, including SolarWinds Log & Event Manager, SolarWinds Firewall Security Manager, SolarWinds Patch Manager and SolarWinds Serv-U which is the beginning of our security products portfolio. In addition, we have a lot of compliance and security features within our network management programs which include network configuration management, user road device tracking and traffic analysis. We have not historically done a very good job of connecting these products and features in the security market. However, given the increased level of attention of security, driven by several high-profile data loss incidents over the last 6 to 9 months, we plan to begin to tell a much more comprehensive security story during 2014 based on the products which we have today and the security problems that these products can address for IT Pros.

We believe that the portions of the security market which are addressable within our current products is largely an untapped growth opportunity for us. We expect to bring more technology to market in 2014 than at any other point in our history. I'm particularly excited about the progress we're making on our network management product line as we believe that these investments will once again widen the gap between our products and those of our competitors, both large and small. These new features and products expand a number of problems that we're able to solve for IT Pros with our brand of easy to try bi-implemented use products. As these new features and offerings become available, we believe they will provide us with the opportunity to capture an increasing percentage of the demand for solutions and network and systems management challenges that are faced on a daily basis by IT Pros. We also believe we will be able to more rapidly expand the use of our products for our existing customers through the expansion of the number problems that we can solve for them.

In summary, we're enthusiastic about where we are positioned as we enter 2014. We believe that the business and the products we have today and in the market we've historically served have the potential of generating growth rates meaningfully higher than our 2013 total revenue growth rate of 25%, and we are focused on driving to that outcome.

We also see a number of opportunities that are currently available to us with only small additions to our current product portfolio, and we believe we can exploit in the short term to drive additional growth. We plan to begin to invest in these opportunities during 2014. We remain committed to our stated long-term goal of driving new business growth rates of greater than 20% in the markets we currently serve. And finally, as we indicated at our Analyst Day in November, as we are watching the evolving cloud management opportunity, we believe we have the technology comment available to us to create a unique ability to solve the performance management challenges that IT Pros and DevOp pros are beginning to face. While we believe this market opportunity is relatively small today, we also believe it is growing rapidly and will be at a stage of maturity that we can use our go-to-market model to begin to disrupt. With that, we will open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Ken Talanian from JPMorgan.

Kenneth R. Talanian - JP Morgan Chase & Co, Research Division

Nice job with these results. I mean this is probably the best quarter we've seen in the last 3, for sure. As I look back, we tried to wrap our heads around what was causing the decline in license revenue and we looked at secular issues, we looked at macro issues and we suspected macro, but we couldn't prove it. So we looked to secular and we couldn't prove that either. So we ultimately concluded that it was your own execution. And over those past few quarters, you've made changes to the sales force and you made changes to the marketing organization, as well as absorbing 2 of the large acquisitions you've ever done. So when I look at this quarter and want to I think forward into 2014, what has changed significantly that's positively impacted your ability to generate new business?

Kevin B. Thompson

Yes. Thanks, Ken. I can see John's style of asking question is starting to rub off on you. That was a long question. So I'm going to do my best to kind of respond to all the pieces of that. But what I'd say is, look, we look at the things we've been working on over 2013, I think we've consistently said that we didn't believe there were competitive forces impacting us. We didn't believe that the macro environment is really causing some of the issues that we were seeing, that we really needed to focus on making sure our business was performing at the level we believe it ought to perform. And so we've done a lot of things over the last 9 months of 2013 to make sure that the quality of demand that we are capturing is improving, that we're able to grow the quantity of demand while maintaining a consistent quality of demand. That's been a big focus. I'm not going to tell you we're done, but I'm going to tell you we made a lot of progress. We've also been focused on making sure we have enough sales reps in place to convert demand into acceptable rate, and we definitely seen our conversion rates improve and be at their highest levels of the year in the fourth quarter. So we feel like we're making progress there. And I think we are staffed at a more accessible level than we have been in a long time. There's been a big focus for us on the sales side. Now, I think the combination of those 2 factors has increased the consistently good performance that we had, and I think you saw that beginning in Q3. You definitely saw more of that come through in the fourth quarter. So it feels like that the things we're doing and the changes we've made and the additional visibility we've been creating for ourselves have begun to have a really positive impact on the business. We still have things we want to do. I don't want the business just to run as well as it did in 2012. I want the business to run better. I want to have better visibility, better consistency. I can't guarantee that's going to be the case every single quarter, but that's the goal. Clearly, we've been focused on driving higher license growth. I feel really good about what we did in the fourth quarter. It was a very strong compare in the fourth quarter of 2012, we were going up against and we still delivered 20% of license revenue growth which was an important, I think stake for us to put in the ground and we believe we can do that, so we needed to show that we can do that. So I feel good about what we've done. I feel good about where we're positioned and now it's simply a matter of continuing to execute, continuing to focus on the things we've been working on because I think there's still a lot of improvements we can make and should make to the way our business run and that's going to be a big focus as we move through all of 2014.

Operator

And next, we'll take a question from Steve Ashley from Robert W. Baird.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

I'd like to just go back to the core business around in the Netman, in the Orion products. I think last quarter, you were kind enough to say that if you took a portfolio of 3 of those, that you had really seen some improved license growth year-over-year, maybe into the high single-digits. Any update on how kind of that -- those core products performed in licensed basis in this quarter?

Kevin B. Thompson

What I would say is that those products continue to perform well and the performance has improved. But more importantly, I think what I said in my remarks, what we saw a strong performance across the breadth of our core product portfolio in the fourth quarter. So it was definitely the most consistent growth we've seen across our core products, both in the network management side, as well as the systems management side that we've seen all year. So we feel good that the focus we put in making sure that all the products are performing, that we are creating the connections between the problem the products solve so that we have higher attach, higher cross-sell, that those things are starting to work. So the good thing about Q4 is the comments we made in Q3 still true, but the breadth of that strong performance increased in the fourth quarter from what we saw in the third quarter.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Perfect. And I'd just like to maybe try to drill down on Confio a little bit. I think what everyone would love to get is a little bit of color around what kind of revenue contribution? And then very interested in a little more color on the license, with Jason indicating that because of, I don't know, if it's a VSOE or what have you, that not necessarily a normal percentage of that revenue was recognized as license. Any color on that would be great.

Kevin B. Thompson

So I'll give you a little bit and then Jason will provide a little bit of additional color. So first what I'd say is the new license sales for Confio, so if you want to call it bookings. New business bookings in the quarter, in the fourth quarter were a little higher than what we had built into our outlook. However, the license revenue was not much higher. It was a little bit higher but not much than what we had built into our outlook, mainly because we had a number of transactions that were done under their old contracting model. And under their own contracting model, there were certain provisions in those contracts which don't allow us to recognize license revenue upfront and those were deals that were already on the in flight [ph] when we closed the acquisition on October 7.

Jason Ream

And Steve, I'll just add to what Kevin said. Obviously, as you know, we don't disclose specific results by products, but we gave a range of expectations when we did the acquisition, and I think repeated that when we did our earnings call. We -- the actual results came -- were very consistent with the ranges that we put out, both on the revenue side, as well as on the expense side. And then, when I talked about the total revenue results for the Systems Management group, obviously, we saw in Confio and in Ignite products which is now called SolarWinds Database Performance Analyzer, is within our Systems Management product group. Those results are included in that number. But as I mentioned, the sequential increase that we saw from Q3 to Q4 was driven more by historical SolarWinds products than the SolarWinds Database Performance Analyzer, formerly Confio.

Kevin B. Thompson

So what you're trying to triangulate on [ph] is it was our relatively significant beat of our expectations related to database. It was not. It was really driven by the products we had when we walked into the quarter and the fact that those products performed much better in the fourth quarter than they had at any point in time during 2013.

Operator

Our next question will come from Aaron Schwartz with Jefferies.

Aaron Schwartz - Jefferies LLC, Research Division

I just had a question on -- first, on NPM. I know historically, I believe that had driven a lot of attach with some other products. And so, I guess first question is it seemed like the attach rate on any given purchase order here had increased sequentially. I think we could probably see that with the ASPs. But I guess the question I have is where is the sweet spot there? Can that continue to increase or how do you manage what gets attached on a given PO to not sort of lengthen the deal cycle and then what gets done by the newer sort of cross sales team that you have? Is there any sort of color you can add to that and how you're managing that?

Kevin B. Thompson

That's a good question, Aaron. And so what I would say is that, I think we still have room for that average transaction size to continue to grow. Getting back in that mid $8,000 range. I think it's a good place for us to be. And as you know, Q1 was much lower and that gave us a little bit of heartburn because it dropped much more quickly than we thought it would. It feels good that it's been coming up very consistently from around $6,300 in the first quarter to $8,700 in the fourth quarter, reaching the highest level we've seen since the second quarter of 2012. So I feel good about where it is. It's in a range that works really well in our model. Now I do think it can grow by quite a bit more and still work really well in the model. So I'm not worried if it gets to 10,000, I'm not worried if it gets to 11,000 or 12,000 or 13,000. There's not a number kind of in anywhere closer to where it is today, even with 40% or 50% growth that I really worry about. Because we've shown an ability to close a $50,000 transaction in about the same deal cycle time as a $10,000 transaction and believe it or not, our discount actually to continue usually are lower in a bigger transactions than a smaller transactions. Because we really focus on the dollar value of the discounts we're giving to customer, not the percentage value of the discount that we're giving to customers. So as transaction sizes go up. We actually generally see a little more yield for us in terms of the overall value of the transaction. So the attach is definitely part of what we're trying to do. As I talked about it in my product comments at the end. One of the things we're doing is integrating our products more tightly than they've ever been integrated before. And that's not because we want a solution sale. That's not who we are. It's not ever going to be who we are. And so that when we go back into a customer, when a customer has another problem and they're using one of our products, that they can see a problem that one of our other products can solve and quickly deploy that product and fully integrate it. That strategy is to try to grow the amount of technology that our customers are using from us. So I think we feel good about where it is. I'd be actually okay if it goes up a little bit, kind of sequentially every quarter moving forward. But if it stays in that $8,500 to $9,000 range, that's a good place for us to live.

Jason Ream

And I'll just add to that. Obviously, the average transaction sizes now are higher than they were at the beginning of the year, and I think we actively manage that on a number of fronts to drive those up a little bit. But I do want to say that our expectations going forward are not predicated on that average transaction size continuing to improve -- to increase. Obviously, that may happen to the extent that it does, as Kevin said, that's not an issue for us, but we're also comfortable where they are at the moment.

Aaron Schwartz - Jefferies LLC, Research Division

Okay. And second question if I could, just on the guidance. You've given detailed explanation on sort of why the margins are where they are here in the near-term, but you did raise the revenue guide for '14 and you left the margin where it is. And I guess you've also said, if you beat revenue, we'd see the beat, sort of go to the bottom line. And so, also, I guess, the implied increase here is an increase in your reinvestment phase from what you gave us at the Analyst Day. So can you just provide some color on the Delta there? What on the reinvestment side is going up in absolute dollar terms from what you provided at the Analyst Day?

Kevin B. Thompson

Well, Aaron, probably the best response to that is that our plans at Analyst Day really haven't significantly changed. Obviously, we are talking about now a larger revenue number in 2014 than we were in 2013. But our strategic priorities and where we think our opportunities lie in terms of funding initiatives inside the business have not changed. And so the directional guidance we gave you then is probably your best guide post to go by.

Jason Ream

Yes, I think if you listen to some of the things, as I indicated we're working on the product side, as we look at 2014 and as we kind of raise our view of what we thought -- where revenue would end, we're going to move some of those product priorities forward a little more quickly, maybe than we had initially planned. But I think our goal right now is to manage those markets right around that 41% level for the full year. They could be higher. Right, they were 45% in the fourth quarter, our model has leverage where we beat our revenue number. But just because we raise our expectations, it doesn't necessarily mean we're going to raise margin outlook at this point. I think we're at 41% planned non-GAAP margins. I think we're in kind of the right level. Hopefully, we'll outperform revenue and we'll outperform margin. But if we just come in consistent with our revenue guide that we gave you just now for 2014, then assume the margins are going to be right in line with what we provided.

Operator

And our next question will come from Kirk Materne with Evercore.

Stewart Materne - Evercore Partners Inc., Research Division

Kevin, if I heard you correctly, I thought I heard you say that you upped the sales capacity by about 20% in the quarter, and I was just kind of curious what that looks like or what's sort of baked into your investment in 2014 in terms of sale capacity? And I guess, specifically, what are you guys thinking in terms of further ramping up the inside -- or the installed base team as those results are obviously very strong?

Kevin B. Thompson

Yes. So what I said was as we ramp -- we added 20% sales capacity since March 31. So over the last 9 months of the year, we have now 20% more reps than we had on March 31. So really it's a 9-month add. So as you look at 2014, the increase in sales headcount is going to be more consistent with overall new business growth. And so it'll be a lot more linear than it was in 2013. As we've indicated, we kind of walked into this year, we didn't have the kind of capacity we needed on the sales floor to convert demand at the level we want to convert it. So we really had to catch up. So 2013 was a catch-up year. You'll see 2014 be more of a linear sales growth, consistent with more what you've seen in the past. Your installed base is kind of a -- is a good one. That team is really performing well. The processes we put in place seems to be working. We're going to continue to invest in that team as long as productivity continues to remain high. So we'll add to the team that we built in EMEA, we'll add to the team we already have in North America. We also will begin to really build out the team in Asia Pacific. Because we really haven't started that initiative yet. So that will definitely be one of our investment areas. But the great thing we've learned with that team is those reps ramp pretty quickly and so you add a rep, you add your bookings relatively quickly. So the key now is to figure out how fast can I add reps and not have productivity decline, and we'll play with that a little bit as we move into 2014.

Stewart Materne - Evercore Partners Inc., Research Division

And just if I could, a really quick follow-up, your comments around the security market and your opportunity there were interesting. I guess when you guys are sort of ramping additional investment in marketing, and you broaden out into a new very large market that's very competitive, I guess is there any concern that it gets distracting for what the marketing aims working on? Do you think you can handle broadening out into an adjacent market, but nevertheless a big market at the same time while you're still ramping up or improving on what you're doing in your core markets?

Kevin B. Thompson

Yes. So the real key there is, as I indicated in my remarks, we're going to take the products we have today and the set of problems those products have already solved and we're just going to do a better job of telling the story. So that means on our website, we're going to connect those products, we're going connect those problems, we're going to connect the security issues that IT Pros are facing today to the problems that the products solve, which I don't think we've done a great job of. You're not going to see us do a huge marketing push from a PR awareness point of view into the security market in any kind of one big look. You're just going to see additional messaging on the website, a little bit of additional search work around terms, around problems that our products solved. So don't expect some huge launch, some huge push. That's not what you're going to see from us. In fact, you're really going to see what you've seen from SolarWinds over the last 7 years which is add content, add search, begin to build awareness, build traffic, build download volumes. As all that grows, the business we believe will grow. And we're going to go at it in the same way we historically have which allows us to do it without creating that distraction.

Operator

Our next question comes from Scott Zeller with Needham & Company.

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

Following up on Kirk's question around sales. Could you give us some color, Kevin, around the impact of when those hires were made and when you actually saw it flow through to productivity? I guess the question is really about the ability to ramp?

Kevin B. Thompson

Yes. So we've been adding reps pretty quickly since April 1. And so it's been a relatively steady increase in the number of sales reps we have over the last 9 months of the year, with a heavier increase in Q2 and Q3 than what we saw in Q4, then we did add a number of reps in Q4 also. So I think you -- what does it tell us about our ability to ramp reps? So I think, one, we put up a huge focus on training over the last 6 months in our sales organization and we built a bunch of training methodology in processes and content, and we've created some roles within our organization to be able to make sure we're doing that on a consistent basis, and we're not just doing initial training, we're also doing a great job of coaching. So I think we put a lot of processes in place to allow us to add rep and get to be more productive, even faster than what we've been able to do in the past and we're definitely have more focused than we ever have. So I'm not concerned with our ability to add reps quickly when we need to and ramp them to an acceptable level of productivity. I think we are in a better position than we ever have been to do that. Now it's simply a matter of doing it.

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

As most of these ramps -- I'm sorry, most of these reps have been in for 6 months or less, how would you characterize their productivity? Would you say it's -- there's a lot more ahead of them? These newer folks that have shown up, you've had strong results. I mean how would you characterize their deficiency, thus far?

Kevin B. Thompson

Yes, so as I indicated, we had the highest level of rep productivity in Q4 than we've seen since Q1. In Q1, we had good rep productivity, we just didn't have enough reps. So we added 20% to that rep count, but still had productivity improve over what we saw in Q2 and Q3. So what that said is the reps we're adding are ramping quickly. And that they're getting to an acceptable level of productivity and then building upon that. Definitely, the guys we've added in the last 30 or 60 days are from not quite at the same level of folks that have been on board for 6 months or 9 months, but they're all making kind of steady progress towards where we want them to be. So there's definitely more capacity and more ability to perform in our organization than what we saw in Q4. So we've got more capacity to book business than the total amount of business we booked in Q4, but that's where we want to be. We want to make sure we've always got more capacity than what our outlook is and that we're quickly getting that capacity productive. One of the keys, just to remind folks is that we don't have the model when the rep shows up and in 6 months maybe he sells something. And during that period of time, you paid him $100,000 in base comps. We don't do that. Our reps are going to sell something in the first few weeks. Within 30 days, they're going to be selling quite a bit. And within 90 days, if they're not at kind of 80% or 90% of the level of productivity that we expect them to be at and getting really close to the level of productivity of their peers on the row, then we're going to do a bunch of coaching, a little bit of counseling. And if we still can't get them there, then we're going to bring a new rep in. So we've got an advantage that our reps are -- they don't have to build pipeline for 6 months to sell something.

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

And one last one on the European region, could you characterize what it was that actually drove the strong results? We've heard about some replacements in management and the need to hire more inside sales. How would you -- what would you say were the main drivers of success?

Kevin B. Thompson

Yes, a very good couple of factors. So one, we added to our -- the depth to our sales management team. We indicated, we added a VP in EMEA, we added 2 directors under that VP, we added managers. We also increased rep headcount. So the combination of factors of increased senior leadership, increased oversight, more sales capacity to help us respond to the level of demand that we're generating in that region a lot more effectively, it's really the combination of all of that, that resulted in much better performance in Q4 than we saw in the rest of the year. So, it's really not on account of one thing. It's a combination of a lot of work we've been doing and a number of different things that we've done.

Operator

And our next question will come from Daniel Ives with FBR Capital Markets.

James Moore - FBR Capital Markets & Co., Research Division

It's actually Jim Moore in for Dan Ives. So just kind of going back to Confio and N-able. Now they're under the hood pretty securely and cash generation is pretty impressive. Do you guys have any change in your appetite for acquisitions or tuck-ins over the coming quarters?

Kevin B. Thompson

Yes. I think what we've said is that we're going to continue to look for opportunities. We have some things inside our -- gaps [ph] in our product portfolio that we feel like, still, most of those are not large. We have new areas of technology around cloud management, and that we think could be interesting. But we've also indicated that our focus has been, and you've seen this really play out in 2013, is we're looking for products that have average transaction sizes in that $8,000 to $10,000 range. We feel like we've got enough of those small tools that create awareness, that create experience with the brand and those things are part of what you need in order to solve a broad set of problems for IT Pros. And we generally believe we've got enough of those. So we're looking for technology to either build or we'll buy that are solving a little more complex problems. As you can tell by my remarks, we've got a big investment in building products in 2014. We're going to bring more products to market that we've built in 2014 than any other point in our history. Because we have a big focus on that right now, it doesn't mean we won't make any acquisitions. It just means that's a big focus while we'll continue to be opportunistic and look for strategic acquisitions to make as we move forward.

James Moore - FBR Capital Markets & Co., Research Division

And then just sticking with the comps here on N-able's theme. Would you say it -- or what would you say has really changed in terms of competitive dynamics there since you guys have taken them on, if any?

Kevin B. Thompson

So in terms of who they've been competing with, I don't think really, there's been any real change in the competitive dynamics. I think the N-able team has just done a really incredible job of not being distracted by the acquisition, continue to drive the growth of their business, continue to take market share, and really caused their competitors a lot of pain. And they were doing that before they bought -- before they joined SolarWinds and they continue to do that and do that very well. On the database performance management side, I think it's -- we're only 90 days in, but that team performed well. It's a really good team that we added in Boulder. And we're glad to have them onboard and they once again did the same thing. They really tried and did a nice job of not getting distracted by the acquisition and focusing on bringing the number in that they intended to bring in and making sure they're doing a great job of serving their customers. So I haven't seen any real change other than I think we, by joining SolarWinds, we give them the ability to compete much more aggressively than they have in the past. We give them much more reach than they've ever had before.

Operator

Our next question will come from Keith Weiss with Morgan Stanley.

Jonathan Parker - Morgan Stanley, Research Division

It's actually Jon Parker calling in for Keith. Add my congratulations on the nice quarter. I just wanted to dig in very briefly into the Q1 guidance. I understand you said that there's 2 less days of recognition which obviously impact the maintenance line. But if I look at the midpoint, based on obviously the subscription business continuing to grow, would imply that license part of the business might sequentially decline at a greater rate than we've seen for many, many years. I'm just wondering, how much of that is conservatism, given some of the choppiness that we saw through calendar '13 versus some other factors that might be going on?

Jason Ream

So I'll respond to that and say that at the midpoint of our guidance, we're at the lower high-end. Quite frankly, I think we've given prudent guidance, what we believe is prudent guidance. As I said there, you look at the growth, look at the daily rate of maintenance revenue that we recognized in Q4. It's actually gotten through a pretty meaningful number. So if you subtract out 2 of those days in Q1, it is -- there's definitely an impact to maintenance revenue in Q1 that we would expect. Even modeling a nice sequential increase. And we do, as I said in my prepared remarks, we do expect maintenance revenue to increase sequentially from Q4 to Q1. I think you need to obviously moderate that though for the daily recognition factor. But no, as I also mentioned in my remarks, we do expect Q1 to be a strong quarter on a relative basis for license revenue with year-over-year growth relative to the first quarter of 2013. So I don't think that we're signaling anything other than what we've said in the prepared remarks there.

Kevin B. Thompson

We continue to believe that the changes we made in our business are going to have a positive impact in 2014. In 2014, on a full year basis, we're going to drive higher new business growth, higher license growth than what we saw in 2013. And as we continue to make -- and the other thing I didn't mention in my remarks is we're doing a lot of things where the impact of those investments are not going to come through yet, where you're not going to see a lot of the product releases that we're working on. They haven't been made yet, and they're going to come later in the year and start to impact our overall growth. And until we see the impact of those things, and see actually how large that impact is, we're not going to put that into our outlook. When we start to see it, we'll start to put it into the outlook. So there's a number of initiatives we're working on that it's too early for us to say, hey, those are going to impact 2014 by x% or y%. When we actually get that work done, begin to see a little bit of the impact that, that work creates and then hopefully, we'll be able to -- be able to raise our outlook for the year. But until we see that, we're not going to do it. So I think the outlook we provided is a big step up from what we provided at Analyst Day. It's higher new business growth than what we saw in 2013 and reflects the confidence we've got in our business and the confidence in the improvements that we've made over the last 6 months.

Jonathan Parker - Morgan Stanley, Research Division

Great, that's helpful. Just a clarification also, Jason, you're talking about some of the lumpiness, I think in the MSP business in that by the end of the year, I think you said that we should see sort of the similar type of sequential increase that we saw this Q4, if I remember right. Could you just clarify that is that sort of what's driving that sort of lumpiness throughout the year and again, whether that -- if I interpreted that comment, correctly?

Jason Ream

Well, I definitely didn't say lumpy. Because we're not guiding you to the specific numbers. I just wanted to give you the clarity that obviously, that is a ratable recognition model for all the revenue in our MSP business. And when you look at the subscription revenue line specifically, it's a new business for us. Prior to the acquisition, N-able had another -- other focus besides just the subscription revenue. That is now their primary focus. And so imagine starting a subscription business from basically from ground zero. You're going to have modest expectations of that ramp. So I'm just trying to give you that visibility in thinking about how the year will play out there. And that's probably the best way to look at it.

Kevin B. Thompson

I think it'll get to -- I mean you guys look at other ratable models and this is not the only one out there. The revenue is going to build sequentially quarter-to-quarter. So revenue is going to increase in Q1 over Q4, Q2 over Q1. I think what we're saying is we think that because the way that model works, that the back half of the year growth, and recognize revenue will be a little stronger than the front half of the year growth. We're not telling you it's going to be markedly different. We're just going to tell you it's going to be a little bit higher. So as you build your ramp to kind of build the ramp so that it accelerates a little bit as we move through the year. We have a time for two more questions, please.

Operator

The first question will come from Gregg Moskowitz with Cowen and Company.

Gregg S. Moskowitz - Cowen and Company, LLC, Research Division

Kevin, Virtualization Manager seemed to do a lot better in this quarter. And I'm wondering other than the overall sales capacity and demand gen improvements that you've made at your company, if there is anything you saw in that product specifically in the Q4 that you could talk to?

Kevin B. Thompson

Yes. We had a really strong quarter in sales of SolarWinds Virtualization Manager. By far, the best quarter we've ever had by a pretty wide margin. I think there's a couple of things going on. Because I've been building -- as the quarter unfolded, as we saw very strong performance and a number of transactions, a high level of interest in that product, higher than what we've seen in the first 9 months of 2013, we really did a little digging to try to understand all the reasons why that's happening. I think some of it is we're just doing a much better job of talking about the problem that product solved. So we're capturing more demand that exist on the web than we were capturing before. But I'd also add, it feels like there's been a little bit of an inflection point that has been hit in that virtualization management market. That more companies are realizing that managing their virtual environment is not a nice-to-have, which is why I think maybe some of them ordered before. But it's a have-to-have and it's becoming more critical kind of with every passing day. So there seems to be a lot more discussion by IT Pros around that topic, a lot more IT Pros evaluating our products. Obviously, a lot more IT Pros buying our -- that virtualization management product. We really haven't built that kind of growth yet into 2014 because 1 quarter does not make a trend. But I'm optimistic about it. It really feels like that, that area of IT management has hit an inflection point where it's becoming a critical part of the overall management strategy instead of a, with many companies, just a nice-to-have part of the management strategy.

Gregg S. Moskowitz - Cowen and Company, LLC, Research Division

Okay, that's helpful. And then earlier, you talked about ASP being at a good level. I'm just wondering overall if your desired level of transaction gross, going forward, number of transactions is still kind of in that 20%, 30% year-over-year range?

Kevin B. Thompson

Yes, I think what Jason indicated was that we really haven't built into our outlook for 2014 if that average transaction size goes up much in terms of growth in 2014 right now is really going to be driven by volume. And now, could it go up some? Sure, I think it could. If we do a good job of continuing to attach once we get all this integration work done with our products, we clearly think at that point, our attach rates will go up and then we'll see our transactions start to rise. But that work won't get done early in the year. It will get done much later in the year. So I don't know how much impact that will have on the full year, we really haven't built any of the impact in at this point. So right now, we're assuming volume growth is going to drive our new business growth in 2014. But if we get some increase in average transaction size, that would be great. But if we don't, we should be fine.

Operator

And next, we'll go to Tim Klasell with Northland Securities.

Tim Klasell - Northland Capital Markets, Research Division

Most of my questions have been answered but congrats on the quarter. Two quick ones. The shape of the deal sizes, was it skewed by -- the ASP going up skewed by some large deals or was the dispersion of deal sizes, let's say, similar to what we saw in maybe a year ago in '12?

Kevin B. Thompson

Yes. We definitely didn't see a significant skew to the average transaction size from bunch of large transactions. We saw good attach rates. We saw good product mix with our core product as I indicated on the call. All of our core products, most of our core products performing well. Virtualization Manager performed well, Storage Manager performed well. Application Performance Monitor performed well. So we had really good performance across a number of our core products and those core products have averaged, higher average selling prices, so ASP and average transaction size are 2 different things. But the ASPs on those individual products are higher. So when those products perform well, we typically see average transaction sizes go up and that's what we saw in the fourth quarter, and we expect those products continue to perform well in 2014, which is why we think average transaction sizes will be in that range. They could be a little lower, they could be a little higher in any individual quarter and really [ph] what you've seen in the past. We think they'll be in that $8,000 range.

Tim Klasell - Northland Capital Markets, Research Division

Okay, great. And then just a quick housekeeping one, Jason. The license lines are products that went into deferred with the Confio product. Does that have like a milestone where they could come off in maybe rapid succession at one point in time, or will those be coming off the balance sheet in a ratable manner?

Jason Ream

Those will come off the balance sheet in a ratable manner, Tim, and probably over the course of 12 to 24 months.

Tim Klasell - Northland Capital Markets, Research Division

Okay. And can you give us any feel for what the absolute license line from Confio is in the deferred revenues?

Jason Ream

No, we don't disclose that by individual products.

David Hafner

Okay, that concludes our fourth quarter earnings call. Thanks everybody for listening today. So long.

Operator

And once again, that does conclude our conference call for today. Thank you for your participation.

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Source: SolarWinds Management Discusses Q4 2013 Results - Earnings Call Transcript

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