SolarWinds Scores Big Growth On The Little Tech Guys

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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 ( SWI ), 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 IBD.

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 $8,800.

A lot of times there is no need to tap capital budgets and get sign-offs from the top, such as the chief information officer.

Solutions from bigger rivals, such asHewlett-Packard ( HPQ ),CA Technologies ( CA ) andIBM 's ( IBM ) 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 last quarter.

"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 problems."

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 solutions.

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 they prefer.)

"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 clients.

"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 year.

Still, SolarWinds is growing "substantially faster" than software-support arms of large firms such as CA andBMC Software ( BMC ), 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 providers.

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 $34.6 million.

Small Acquisitions

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 go-to-market model."

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 business.

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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: BMC , CA , HPQ , IBM , SWI

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