You're at work and something goes wrong with your computer or
network connection. So you call the guy in tech support. But who
helps the tech guy?
A lot of big software firms provide customized solutions to
make sure systems at companies run smoothly, troubleshooting when
they don't. They can be expensive.
Then there isSolarWinds (
), an Austin, Texas,-based software outfit founded in 1998 by
brothers Don and Dave Yonce.
The network engineers wanted to provide better tools for
themselves and their peers.
Don came up with the name SolarWinds because of his interest
in astronomy, not because the business had anything to do with
solar or wind power.
"Our go-to-market model is focused on solving the problems
that IT pros face every day while doing their jobs," said CEO
Kevin Thompson in an email question-and-answer exchange with
SolarWinds markets out-of-the-box Web-based IT management
software directly to in-house techies.
Since SolarWinds products are relatively cheap, IT
administrators can usually buy them quickly and directly as part
of their operating budgets. The average transaction is
A lot of times there is no need to tap capital budgets and get
sign-offs from the top, such as the chief information
Solutions from bigger rivals, such asHewlett-Packard (
),CA Technologies (
) andIBM 's (
) Tivoli can run in the tens of thousands of dollars or more.
Orders usually do need to go through the capital-budget sign-off
process, analysts say.
'Against Their DNA'
SolarWinds sells more than 20 different products that address
a variety of IT-management issues.
Asked in a recent conference call whether larger vendors would
try to come "downstream" to compete with SolarWinds' model,
Thompson said he didn't think so.
"Their products are heavy, they're old, they're hard to
implement, they're expensive, they've got large outside sales
forces that want to close very large deals," he said, "(And they)
sell them directly to the CIO." Besides that, he added, "It goes
against their DNA."
SolarWinds' core area of expertise is in network management,
but it's expanded into application performance, systems and
storage, virtualization and security.
Thompson says the company's affordable prices give it a
competitive advantage in tough economic environments. That may
explain why Europe was part of its fastest-growing region in the
"Customers can commit to a smaller purchase," said analyst
Gabriel Lowy of Mizuho Securities. "If you bump your knee, you
can buy a brace and padding. But why not just buy the band-aid
and not pay for the brace and padding and all the extra stuff?
(SolarWinds) addresses pain points, little niche individual
Pacific Crest Securities analyst Rob Owens calls SolarWinds'
business model "revolutionary."
"They're addressing an underserved market and they're actually
creating a market as well," he said. "Some of these (customers)
haven't had tools in place before."
Commercial customers run the gamut from dental offices to
large global enterprises. Federal customers include the Pentagon,
State Department and even the office of the president of the
U.S., according to SolarWinds' partial client list. Its products
sometimes are used to supplement larger IT-management
SolarWinds gains new customers through Web marketing rather
than a costlier direct sales force or traditional reseller
program. (It lets customers buy through third-party sellers if
"We strive to be present in all of the places that IT pros
visit on the Web," Thompson said in his email.
It markets on its own websites, including SolarWinds.com,
DameWare.com and PatchZone.org, as well as Thwack.com, its online
user community and DNSstuff.com, acquired last fall. Other online
forums and social media are also used.
Potential users can download software from its main website on
a trial, and then inside sales reps try to convert them to paying
"It costs them far less to acquire customers than traditional
software companies," Lowy said, "which is why their operating
margins are so much higher."
SolarWinds' operating margin in the second quarter was 53.5%
vs. 50.8% a year earlier.
Revenue in the quarter jumped 40% over last year to $64
million. Profit soared 50% to 33 cents a share, sending the stock
up 19% the day of the report, July 25.
But management forecasts slower growth in revenue and
especially earnings in the third and fourth quarters on tougher
comparables from the prior year.
Analysts' consensus for the full year has profit growing 20%
over 2011 to $1.25 a share, slower than the 33% pace last year,
according to Thomson Reuters. They see earnings rising 18% next
Still, SolarWinds is growing "substantially faster" than
software-support arms of large firms such as CA andBMC Software (
), says Lowy.
SolarWinds' licensing revenue grew 40% in the second quarter
to a record $29.5 million.
What's more, says Lowy, once a license is bought, SolarWinds
is able to charge more on a percentage basis for ongoing
maintenance than conventional software IT-management
That's because initial costs are much lower.
SolarWinds' annual maintenance fees, 25% to 30% of the upfront
license cost, are "a big cash-flow annuity," Lowy says.
Maintenance revenue in the last quarter grew 40%, to a record
The company develops new products in-house and also gains them
though acquisitions, most of them small. It bought seven in the
last two years, including remote-management enabler DameWare in
December and Web Help Desk on July 24. Web Help Desk has a
starting price under $500 per user for a perpetual license.
"The majority of their license growth has come through a
series of acquisitions," Lowy said. "The key to their business
model is to keep acquiring products that they can jam through the
He adds that there is "no shortage of small companies they can
buy." But eventually the law of large numbers will mean they
"either will have to buy larger businesses to make a meaningful
impact or buy a larger number of businesses."
International revenue, 25% of the total, will likely become a
bigger portion of the business as local-language versions of
websites, software, support and documentation gear up more fully.
That could offset slowing growth in the U.S. federal
Japan is the latest to get local-language attention, following
Germany and Brazil.
"It's a pretty major undertaking to localize for a lot of
geographies," Owens said.