Solarwinds, Inc. (SWI)

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SolarWinds (SWI)

Q3 2013 Earnings Call

October 29, 2013 5:00 pm ET

Executives

David Hafner

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

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

Analysts

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

Aaron Schwartz - Jefferies LLC, Research Division

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

Keith Weiss - Morgan Stanley, Research Division

Ben McFadden

Stewart Materne - Evercore Partners Inc., Research Division

Tim Klasell - Northland Capital Markets, Research Division

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

Presentation

Operator

Good afternoon. Welcome to Solarwinds Third Quarter 2013 Earnings Call. [Operator Instructions] This call is being recorded.

At this time, I would like to turn the call over to Mr. David Hafner, Director of IR. You may begin, sir.

David Hafner

Thank you, Aaron. Good afternoon, everyone. Welcome to SolarWinds Third Quarter 2013 Earnings Call. With me today are Kevin Thompson, our President and CEO; and Jason Ream, our Executive Vice President and CFO. Following prepared remarks from Kevin and Jason, we'll have a brief question-and-answer session. Please note that this call is being simultaneously webcast on our Investor Relations webcast at ir.solarwinds.com.

The press release with our results for the third quarter was issued earlier today and was also posted on our Investor Relations website. Please remember that certain statements made during this call, including those concerning our financial outlook for the fourth quarter and full year 2013, our investment strategy and areas of strategic focus; our growth opportunities and expectations; and the integration of recent acquisitions 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-Q for the third quarter of 2013, which we anticipate filing with the SEC on or before November 12, 2013, and the risk factors described in our annual report on Form 10-K of our fiscal year ended December 31, 2012. 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 that are on this call will be presented in 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 table accompanying the press release. Each non-GAAP item in our forward-looking financial outlook that we will provide today has not been reconciled to comparable GAAP item because we cannot reasonably or reliably estimate future adjustments of 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, and thanks for joining us on our third quarter 2013 earnings call. To start, we hope to see many of you next week at our Analyst Day in Boston on November the 7th. We will save our thoughts on future products, marketing growth strategies for that event and focus our comments on this call on our third quarter results.

We are pleased to report that we saw improved performance in our Commercial Market business in the third quarter. Our Commercial Market license sales growth rate accelerated across many key areas. Our strong third quarter Commercial Markets sales results allowed us to overcome U.S. Federal license sales, which were approximately $2 million below our expectations for the quarter and still deliver total revenue which exceeded the high end of our outlook.

As I mentioned, primarily driven by the changes we have made in our business over the last several quarters, our commercial market performance are strong across many key areas.

First, in the third quarter, we drove the highest level of year-over-year growth in commercial market license sales of our flagship Network Management products -- SolarWinds Network Performance Monitor, SolarWinds NetFlow Traffic Analyzer and SolarWinds Network Configuration Monitor that we have seen in the last 6 quarters.

Second, we saw an acceleration in commercial market license sales growth of our key systems management products with SolarWinds Server & Application Monitor license sales accelerating from its second quarter 2013 growth levels and SolarWinds Virtualization Manager experiencing its strongest quarter of year-over-year license sales growth in the last 4 quarters.

Third, after a difficult second quarter in EMEA and Asia-Pacific, we saw accelerating growth in these geographies in the third quarter. New license sales in EMEA increased by over 12% sequentially. Our improved EMEA performance was driven primarily by strength in network management license sales in the U.K. and Russia, partially offset by weakness in Germany. We also saw a significant improvement in performance in Asia Pacific as new license sales in the region grew by 9% year-over-year in the third quarter compared to a slight year-over-year decline in the second quarter. Our growth in Asia Pacific was driven by strength in China and Hong Kong.

Fourth, our commercial market core product transaction volumes continued a string of strong growth quarters, increasing by 18% as compared to the third quarter of 2012. In addition, we experienced a sequential increase in commercial core product average transaction size, reaching approximately $7,700 for the third quarter 2013.

And finally, our MSP business, which is almost exclusively focused on the commercial market, delivered a record number of new subscription customers in the quarter and reached an all-time high in subscription bookings, delivering 87% year-over-year growth. We remain excited about the growth opportunities for our MSP business and in the fourth quarter, we expect to begin to leverage more aggressively many of the assets we have at our disposal across our global business to accelerate the growth of this business even further.

Turning to our U.S. Federal business, our U.S. Federal license sales result in the third quarter of 2013 were disappointing. They reflect what we believe was a uniquely challenging environment. We navigated this environment well in the first 2 quarters of 2013, delivering solid year-over-year growth. However, late in the third quarter, the issues surrounding the sequester or lack of an approved increase to the debt ceiling and the uncertainties around the looming U.S. government shutdown seemed to catch up with us. We believe we had taken a conservative view of our U.S. Federal pipeline given the chaos surrounding these issues. However, as we near the end of the third quarter and the reality of the pending shutdown grew closer, we had a number of what we consider run rate deals, in the $100,000 to $300,000 size range, get delayed. However, the silver lining is that we believe that most of the deals that slipped out of the third quarter are still active opportunities that we have the potential to close over the coming quarters.

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