Solarwinds, Inc. (SWI)

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SolarWinds (SWI)

Q4 2012 Earnings Call

February 04, 2013 5:00 pm ET

Executives

David Hafner

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

Michael J. Berry - Chief Financial Officer and Executive Vice President

Analysts

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

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

Aaron Schwartz - Jefferies & Company, Inc., Research Division

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

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Stewart Materne - Evercore Partners Inc., Research Division

Jonathan Parker - Morgan Stanley, Research Division

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Scott Zeller - Needham & Company, LLC, Research Division

Tim Klasell - Northland Capital Markets, Research Division

Presentation

Operator

Good afternoon, and welcome to the SolarWinds' Fourth Quarter 2012 Earnings Call. [Operator Instructions] Today's call is being recorded. And at this time, I would like to turn the conference over to Mr. Dave Hafner, Director of Investor Relations. Please go ahead, sir.

David Hafner

Thank you, Fara. Good afternoon, everyone, and welcome to SolarWinds' Fourth Quarter and Full Year 2012 Earnings Call. With me today are Kevin Thompson, our President and CEO; and Mike Berry, our Executive Vice President and CFO.

Following prepared remarks from Kevin and Mike, we'll 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.

The press release with our results for the fourth quarter and full year 2012 was issued earlier today and is also posted on our Investor Relations website. Please remember that certain statements made during this call, including those concerning our business and financial outlook, competitive advantage, expansion plans, areas of focus for 2013, growth strategy and expectations, estimates regarding our market opportunity and approaches for attacking this market opportunity, acquisition strategy and evaluation criteria, product development efforts, sales and marketing efforts, opportunities for the companies -- for the company and our products, and our ability to capitalize on these opportunities 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 year ended December 31, 2012, which we anticipate filing with the SEC on or before March 1, 2013.

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...

Operator

Pardon the interruption gentlemen, we are unable to hear you at this time.

[Technical Difficulty]

Kevin B. Thompson

Hello, everyone, this is Kevin Thompson. I think, maybe, we had a small technical difficulty. So we're going to start again just to make sure that all of our remarks are heard.

So starting again, good afternoon, everyone. Thank you for joining us on our fourth quarter 2012 earnings call. I'm pleased to report that we finished what has been a very successful 2012 on a high note, delivering a strong fourth quarter, with total revenue reaching $73.5 million, reflecting 32% growth over the fourth quarter 2011 and for the eighth straight quarter, meaningfully exceeding our outlook.

For the full year 2012, total revenue reached a record $269 million, we delivered non-GAAP operating margins of 53.8%, our highest level since before IPO in 2009 and our total revenue growth accelerated to 36% in 2012 as compared to 30% for 2011.

I believe the strength in our 2012 performance demonstrates the success we have had in significantly increasing the number of problems we solve for IT professionals. This success has transitioned SolarWinds from being just a network management company into an IT management software company, with a portfolio of products that solve a connected set of problems for IT pros in organizations of all sizes.

We believe our 2012 results highlight our ability to create competitive advantage in new markets at economics consistent with our historical businesses, while remaining completely committed to the foundation principles of our unique and disruptive business model. These foundation principles include a go-to-market model, which leverages the Internet to reach our potential buyers, products, which are easy to evaluate, implement and use, that are priced at a fraction of competing products, a focus on the IT pros who use our software to solve their IT performance problems, a global development model that allows us to build products at a cost that we believe is among the lowest in the software industry, a sales model that is completely dedicated to selling from the inside and a financial model that delivers operating margins that are among the highest in software, while at same time, allowing us to invest for growth.

Importantly, before moving on to a discussion of some of the highlights of the fourth quarter results, I would like to thank the entire global SolarWinds team for all of their effort and hard work over the past year. The work you have done and the progress you have made allowed us to continue to defy the conventions of how enterprise software is built, purchased and used.

In 2012, we made significant investments in order to build awareness of the problems our products solve across IP markets and around the world. We meaningfully expanded the number of IT problems we can address and the users we are relevant to. In the process, we completed 5 product acquisitions, which have allowed us to grow broader and deeper in the markets we serve. As a result of all these activities, we accelerated our year-over-year revenue growth rate, reaching 36% for 2012.

However, despite these significant investments, your commitment to doing things the SolarWinds' way also enabled us to deliver non-GAAP operating margins of 53.8% for the full year, along with helping us to generate consistently strong free cash flow, which totaled $150 million for the year.

As I mentioned earlier in my remarks, total revenue for the fourth quarter increased to $73.5 million, representing growth of 32% versus the fourth quarter of 2011. Our growth in total revenue was driven by a combination of solid growth in license and maintenance revenue that were both well ahead of our outlook for the quarter. License revenue for the fourth quarter increased 31% year-over-year, reaching $33.1 million. Maintenance revenue also continued a series of rapid growth quarters reaching $40.5 million, reflecting 33% growth over the fourth quarter of 2011.

Our fourth quarter 2012 growth in new license sales reflects another strong and consistent quarter across both our global commercial business and our U.S. Federal business. Commercial new license sales grew 29% year-over-year in the fourth quarter, driven by solid results across each of our major geographies, despite the fourth quarter being the toughest compare from a growth perspective in 2012.

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