Solarwinds, Inc. (SWI)

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SolarWinds (SWI)

Q3 2012 Earnings Call

October 25, 2012 9:00 am 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

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

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

Adam H. Holt - Morgan Stanley, Research Division

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

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

Scott Zeller - Needham & Company, LLC, Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Stewart Materne - Evercore Partners Inc., Research Division

Karl Keirstead - BMO Capital Markets U.S.

Presentation

Operator

Good morning, and welcome to the SolarWinds Third Quarter 2012 Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Dave Hafner, Director of IR. Please go ahead, sir.

David Hafner

Thank you, Roxanne. Good morning, everyone, and welcome to SolarWinds' Third Quarter 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 third quarter 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, product roadmap, growth plans and opportunities of the company, and our products and our ability to capitalize on our 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-Q for the third quarter of 2012, which we anticipate filing with the SEC on or before November 9, 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 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 morning, everyone, and thanks for joining us for our third quarter earnings call. Believe it or not, we are planning to make our comments on this call a bit shorter than normal. Our Annual Analyst Day is scheduled for November 13 in New York. So to make sure give you a great reason to come to that event, we are going to save some of the really good stuff related to product and market strategy, geographic expansion, potential new markets, M&A strategy and, yes, our growth forecast for 2013 for our discussion at our Analyst Day. So if you're interested in hearing our thoughts on these topics, please sign up to attend in person or plan to listen in on the live webcast.

Today we're going to focus our comments on the strength of the Q3 results that we just announced and on our forecast for the fourth quarter. I'm very pleased to report that we delivered yet another in a series of quarters of record results. Total revenue exceeded our forecast, reaching a record $71.7 million, increasing year-over-year by 33%. Our operating model once again showed its resilience and leverage, shaking off the dilutive impact of 2 small acquisitions we made during the quarter and allowing us to deliver record non-GAAP operating profit of $39.6 million and an operating margin of 55%. This represents our strongest quarter of operating margin performance in 3 years.

We believe that our recent results illustrate the strength and consistency of our go-to-market approach to all of our market areas. Unlike almost all other companies in enterprise software, we focus exclusively on developing relationships with the individual IT pros who use our products on a daily basis. We are focused on making these IT pros successful, providing solutions to their daily challenges which simply work and solving their IT management problems the way they want these problems solved. We provide them with products that are easy to implement, use and maintain. In addition, we make these products available to them at prices that are among the lowest in the industry.

As you've heard us say on several occasions, we call this concept unexpected simplicity. It is the cornerstone of our company and is a driving factor in all the decisions that we make. We also believe that it's important that IT pros view our products and market expansion efforts as logical extensions of the problems we have historically solved for them, that we build on a positive relationship that we have developed with several hundred thousand IT pros around the world over the years and that we continue to delight them with the solutions we provide to their daily challenges. We believe that our success in meeting these goals has been a significant factor in the progress we have made in increasing awareness among IT professionals to the widening range of IT management issues our products address for them. We believe that the increase in awareness has had a significant influence on our accelerating revenue growth rate in 2012.

In addition to total revenue increasing year-over-year by 33% and reaching a record $71.7 million, our license revenue also grew 33% in the third quarter of 2012 compared to the third quarter of 2011, reaching a record $34 million. To complete the trifecta, third quarter maintenance revenue grew 33% year-over-year as well, finishing the quarter at a record $37.7 million.

Third quarter new license sales were led by our commercial business, which continued this year's trend of greater than 35% year-over-year growth quarters, delivering 39% growth over the third quarter of 2011, reflecting an acceleration from 37% year-over-year growth in the second quarter 2012. In addition to strong overall global growth, our commercial business saw a solid year-over-year growth in all our geographic regions during the third quarter.

We have also seen a meaningful improvement in the consistency of the commercial business sales performance within each of the first 3 quarters of 2012. The third quarter was the most linear commercial quarter in our history with new license sales strength across each month of the quarter. Once again, our EMEA sales team bucked the trend we have seen for many technology companies who have underperformed in Europe this year. EMEA led our new license sales growth for the third straight quarter, posting a year-over-year increase in new license sales of 65%. The U.K., Germany, France and the Middle East were the third quarter's EMEA growth leaders, each putting up year-over-year new license sales growth rates of greater than 60%.

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